Paper by Cars Hommes published in the Journal of Monetary Economics
The paper ‘Managing self-organization of expectations through monetary policy: A macro experiment' by research fellow Cars Hommes (University of Amsterdam) and PhD alumnus Domenico Massaro (Catholic University of Milan, Italy), Tiziana Assenza (Toulouse School of Economics, France), and Peter Heemeijer (ING) has been published in the Journal of Monetary Economics.
The New Keynesian theory of inflation determination is tested in this paper by means of laboratory experiments. We find that the Taylor principle is a necessary condition to ensure convergence to the inflation target, but it is not sufficient. Using a behavioral model of expectation formation, we show how heterogeneous expectations tend to self-organize on different forecasting strategies depending on monetary policy. Finally, we link the central bank’s ability to control inflation to the impact that monetary policy has on the type of feedback –positive or negative– between expectations and realizations of aggregate variables and in turn on the composition of subjects with respect to the type of forecasting rules they use.
T. Assenza, P. Heemeijer, C.H. Hommes, and D. Massaro, “Managing self-organization of expectations through monetary policy: A macro experiment”, Journal of Financial Economics, Volume 117, January 2021, Pages 170-186, doi.org/10.1016/j.jmoneco.2019.12.005.