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SFB 504 discussion paper No. 98-47:

Why do monetary policies matter? An experimental study of saving and inflation in an overlapping generations model

Michele Bernasconi and Oliver Kirchkamp

Abstract:

We study experiments of an overlapping generations model where agents may transfer wealth from one period to the next (saving) and where government revenue is created through seigniorage. Inflation influences the amount of wealth an agent may wish to save in a given period. Inflation is determined by the monetary policy and by the amount of average saving within each period.

The framing of our experiment differs in several respects from the one that is used by Lim, Prescott, Sunder (1994), Marimon, Spear, Sunder (1993), Marimon, Sunder (1993,1994,1995). Some of the differences are:

The above mentioned literature comes in particular to the conclusion that the choice of the monetary policy does not matter. Only the level of government deficit determines level and volatility of inflation.

Evidence from our experiments in Florence, Mannheim and Pavia challenges this point. We find that:

We relate our findings to the current research on the theories of coordination and equilibrium selection.


We thank Italian CNR and MURST and the Deutsche Forschungsgemeinschaft (SFB 504) for funding the project. The project started when both authors were Jean Monnet Fellows at the European University Institute (Florence) where some the experiments described in this paper were also conducted. We thank the Institute for its hospitality and for the assistance in running the experiments. We thank Ramon Marimon, Amy Verdun, Simon Hug for helpful discussions in designing the experiments.