Experimental Economics

, Volume 18, Issue 4, pp 670–696 | Cite as

Balancing the current account: experimental evidence on underconsumption

Original Paper

Abstract

How should countries in a fixed exchange rate system balance their current account? This question was at the center of the historical debate between Keynes and White in 1944 and is being debated increasingly these days for the Eurozone. Should consolidation by deficit countries be complemented by higher spending in surplus countries in order to avoid a downward bias in the level of consumption? We investigate the associated disequilibrium behavior experimentally, letting our experimental subjects act as heads of state who repeatedly seek to coordinate their policies. If only deficits are punished, as proposed by White, we observe that consumption is persistently reduced and adjustment is slower than in a treatment in which a surplus is also punished, as suggested by Keynes. We find support for the fact that underconsumption occurs for behavioral but not for rational reasons.

Keywords

Beauty contest Current account imbalance White Plan Keynes Plan Deflationary bias Level-k reasoning Eurozone 

JEL Classification

F32 E12 C92 

Supplementary material

10683_2014_9422_MOESM1_ESM.docx (605 kb)
Supplementary material 1 (DOCX 606 kb)

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Copyright information

© Economic Science Association 2014

Authors and Affiliations

  1. 1.University of PassauPassauGermany

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