Abstract
Recent laboratory experiments have demonstrated the occurrence of delays in price adjustment even in an economy without rigidities. As explanations of these real effects, two alternative frictions are generally considered. Under sticky prices, only a fraction λ SP of firms are able to adjust prices each period. Under sticky information, only a fraction λ SI of firms are able to up-date their information each period. I also propose a model with limited higher order beliefs, as an alternative friction. I estimate λ SP, λ SI and the degree of higher order iteration k in order to evaluate which of the three frictions best captures the experimental data and explains the observed price adjustment. I show that sticky information performs best in explaining the observed price adjustment delays in the absence of public information disclosure. The value of λ SI that yields the best fit is found around 0.45, which raises some discussion about how to calibrate new Keynesian models.
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Notes
- 1.
In the tradition of Friedman, models should be judged not by their descriptive realism but by their fruitfulness as an engine of prediction and should therefore be evaluated in terms of the accuracy of their predictions, rather than the ‘soundness of their assumptions’.
- 2.
This is in line with the definition of level-1 reasoning in e.g. Cornand and Heinemann (2014).
- 3.
For more details about the experimental procedure, see Davis and Korenok (2011).
- 4.
The shock occurred between periods 35 and 39, depending on the session.
- 5.
R codes are available upon request.
- 6.
Market outcomes are standardized about the period of the shock (period 35).
- 7.
According to Duffy (2008), testing aggregated predictions of micro-founded models with field data does not sufficiently discriminate between possibly different explanations on the micro-level. The strong predictions that are possible with macroeconomic theories based on micro-foundation depend on the correctness of assumptions about micro behavior. Microeconomic behavior can be tested by laboratory experiments that provide control of various variables (e.g. subjects’ information, communication and payoffs). This possibility has given rise to a fast growing experimental literature testing assumptions of macroeconomic theories.
References
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Cornand, C., & Heinemann, F. (2014). Measuring agents’ reaction to private and public information in games with strategic complementarities. Experimental Economics, 17, 61–77.
Davis, D., & Korenok, O. (2011), Nominal price shocks in monopolistically competitive markets: An experimental analysis. Journal of Monetary Economics, 58, 578–589.
Duffy, J. (2008). Experimental macroeconomics. In S. N. Durlauf & L. E. Blume (Ed.), The new Palgrave dictionary of economics (2nd ed., pp. 113–119). New York: Palgrave Macmillan.
Mankiw, G., & Reis, R. (2002). Sticky information versus sticky prices: A proposal to replace the new Keynesian Phillips curve. Quarterly Journal of Economics, 117, 1295–1328.
Acknowledgements
I am grateful to Douglas Davis and Oleg Korenok for giving access to their experimental data. I thank Samia Badji, Florence Goffette-Nagot, Frank Heinemann, and Frédéric Jouneau-Sion for useful discussions. I am also thankful to the participants to the Symposium in honor of G. Illing that took place at Munich University on March 4–5, 2016, for their comments. Finally, I also acknowledge the ANR-DFG joint grant for financial support (ANR-12-FRAL-0013-01). This research was performed within the framework of the LABEX CORTEX (ANR-11-LABX-0042) of Université de Lyon, within the program “Investissements d’Avenir” (ANR-11-IDEX-007) operated by the French National Research Agency (ANR).
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Cornand, C. (2017). Appraising Sticky Prices, Sticky Information and Limited Higher Order Beliefs in Light of Experimental Data. In: Heinemann, F., Klüh, U., Watzka, S. (eds) Monetary Policy, Financial Crises, and the Macroeconomy. Springer, Cham. https://doi.org/10.1007/978-3-319-56261-2_14
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