Expectations and learning under alternative monetary regimes: an experimental approach

Summary We design and analyze experimental versions of monetary overlapping generations economies under alternative policy regimes. Economies with a constant level of real deficit financed through seignorage, economies in which the level of deficit is adapted in order to follow a monetary policy with a target rate of inflation, and economies with preannounced changes in deficit levels are reported here. We also examine the behavior of an economy with no stationary competitive equilibrium. Our time series are compared to rational expectations equilibrium paths and to adaptive learning dynamics.Financial support for our work from the Graduate School of the University of Minnesota, the National Science Foundation (SES-8912552), Richard M. and Margaret Cyert Family Funds, and the Ministry of Education of Spain is gratefully acknowledged. We wish to thank Javier Diaz-Giménez, Jean Michael Grandmont, Robert Lucas, Albert Marcet, Charles Plott, Edward Prescott, Thomas Sargent, Neil Wallace and Michael Woodford for commenting on our work. We also thank Vijay Rajan for developing the software for the computerized experimental environment, and Jackie Cuccaro and Dhananjay Gode for their research assistance.