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Experimental Economics

, Volume 13, Issue 2, pp 146–166 | Cite as

An experimental test of Taylor-type rules with inexperienced central bankers

  • Jim Engle-Warnick
  • Nurlan Turdaliev
Article

Abstract

We experimentally test monetary policy decision making in a population of inexperienced central bankers. In our experiments, subjects repeatedly set the short-term interest rate for a computer economy with inflation as their target. A large majority of subjects learn to successfully control inflation by correctly putting higher weight on inflation than on the output gap. In fact, the behavior of these subjects meets a stability criterion. The subjects smooth the interest rate as the theoretical literature suggests they should in order to enhance stability of the uncertain system they face. Our study is the first to use Taylor-type rules as a framework to identify inflation weighting, stability, and interest-rate smoothing as behavioral outcomes when subjects try to achieve an inflation target.

Keywords

Monetary policy Taylor rule Experimental economics Repeated games 

JEL Classification

C91 E42 

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Supplementary material

10683_2010_9233_MOESM1_ESM.pdf (552 kb)
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Copyright information

© Economic Science Association 2010

Authors and Affiliations

  1. 1.Department of EconomicsMcGill UniversityMontrealCanada
  2. 2.Department of EconomicsUniversity of WindsorWindsorCanada

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