Inflation and Expectations in Experimental Markets

Abstract

A total of nine experimental markets were studied. Seven of these involved eleven to twelve periods of inflation at a constant percentage and then two or three periods of no inflation. Two experiments involved no inflation for twelve periods and then inflation at a constant rate for three periods. In all but three markets, participants were asked to guess the mean price of the upcoming market period before they had any information about the parameters for that period. The subject with the best guess was given a financial reward in addition to any profit earned in the market.

Convergence properties are compared. Rational expectations models are tested and the structure of forecasts are studied. In general the rational expectations models capture much of what is observed but paradoxes exist in the data and in the application of the models.

Brian Daniels is a Caltech undergraduate and Charles Plott is a professor of economics. The financial support of the National Science Foundation and the Caltech Program of Enterprise and Public Policy is gratefully acknowledged. The authors also wish to thank David Grether, Kemal Guler, Jeffrey Dubin, Thomas Saving, and Edward Zanelli.