Pricing decisions in an experimental dynamic stochastic general equilibrium economy

Charles N. Noussair, Damjan Pfajfar, Janos Zsiros

Research output: Contribution to journalArticlepeer-review

12 Scopus citations

Abstract

We construct experimental economies, populated with human subjects, with a structure based on a nonlinear version of the New Keynesian dynamic stochastic general equilibrium (DSGE) model. We analyze the behavior of firms' pricing decisions in four different experimental economies. We consider how well the experimental data conform to a number of accepted empirical stylized facts. Pricing patterns mostly conform to these patterns. Most price changes are positive, and inflation is strongly correlated with average magnitude, but not the frequency, of price changes. Prices are affected negatively by the productivity shock and positively by the output gap. Lagged real interest rate has a negative effect on prices, unless human subjects choose the interest rate, or firms sell perfect substitutes in the output market. There is inertia in price setting, firms integrate wage increases into their prices, and there is evidence of adaptive behavior in price-setting in our laboratory economy. The hazard function for price changes, however, is upward-sloping, in contrast to most empirical studies.

Original languageEnglish (US)
Pages (from-to)188-202
Number of pages15
JournalJournal of Economic Behavior and Organization
Volume109
DOIs
StatePublished - Jan 1 2015
Externally publishedYes

Keywords

  • DSGE economy
  • Experimental economics
  • Menu costs
  • Pricing behavior

ASJC Scopus subject areas

  • Economics and Econometrics
  • Organizational Behavior and Human Resource Management

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