RUHR. The New Keynesian Phillips Curve with Myopic Agents ECONOMIC PAPERS #281. Andreas Orland Michael W.M. Roos

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1 RUHR ECONOMIC PAPERS Andreas Orland Michael W.M. Roos The New Keynesian Phillips Curve with Myopic Agents #281

2 Imprint Ruhr Economic Papers Published by Ruhr-Universität Bochum (RUB), Department of Economics Universitätsstr. 150, Bochum, Germany Technische Universität Dortmund, Department of Economic and Social Sciences Vogelpothsweg 87, Dortmund, Germany Universität Duisburg-Essen, Department of Economics Universitätsstr. 12, Essen, Germany Rheinisch-Westfälisches Institut für Wirtschaftsforschung (RWI) Hohenzollernstr. 1-3, Essen, Germany Editors Prof. Dr. Thomas K. Bauer RUB, Department of Economics, Empirical Economics Phone: +49 (0) 234/ , Prof. Dr. Wolfgang Leininger Technische Universität Dortmund, Department of Economic and Social Sciences Economics Microeconomics Phone: +49 (0) 231/ , Prof. Dr. Volker Clausen University of Duisburg-Essen, Department of Economics International Economics Phone: +49 (0) 201/ , Prof. Dr. Christoph M. Schmidt RWI, Phone: +49 (0) 201/ , Editorial Offi ce Joachim Schmidt RWI, Phone: +49 (0) 201/ , Ruhr Economic Papers #281 Responsible Editor: Thomas K. Bauer All rights reserved. Bochum, Dortmund, Duisburg, Essen, Germany, 2011 ISSN (online) ISBN The working papers published in the Series constitute work in progress circulated to stimulate discussion and critical comments. Views expressed represent exclusively the authors own opinions and do not necessarily reflect those of the editors.

Universitätsstr. 12, 45117 Essen, Germany Rheinisch-Westfälisches Institut für Wirtschaftsforschung (RWI) Hohenzollernstr. 1-3, 45128 Essen, Germany Editors Prof. Dr. Thomas K.

3 Ruhr Economic Papers #281 Andreas Orland and Michael W.M. Roos The New Keynesian Phillips Curve with Myopic Agents

4 Bibliografische Informationen der Deutschen Nationalbibliothek Die Deutsche Bibliothek verzeichnet diese Publikation in der deutschen Nationalbibliografie; detaillierte bibliografische Daten sind im Internet über: abrufbar. ISSN (online) ISBN

Nationalbibliografie; detaillierte bibliografische Daten sind im

5 Andreas Orland and Michael W.M. Roos 1 The New Keynesian Phillips Curve with Myopic Agents Abstract Empirical estimations of the New Keynesian Phillips curve support hybrid versions with a positive weight on lagged inflation and a weight less than one on expected inflation. We argue that myopic price setting of some agents explains the low weight on expected inflation. The lagged term can be explained by trend extrapolation if information about the future is costly. In a laboratory experiment we implement the Calvo (1983) microfoundations of the Phillips curve. Both of our hypotheses are supported by the experimental data. About half of the subjects set optimal Calvo prices while about a third is myopic. JEL Classification: C91, D92, E52 Keywords: Hybrid Phillips curve; experimental economics; myopia; behavioral macroeconomicsl September Both RUB. All correspondence to Andreas Orland, Ruhr Universität Bochum (RUB), Universitätsstr. 150, Essen, Germany. andreas.orland@rub.de.

Roos 1 The New Keynesian Phillips Curve with Myopic Agents Abstract Empirical estimations of the New Keynesian Phillips curve support hybrid versions with a positive weight on lagged inflation and a

6 why

9 future p*t p t

10 1. z t*

11 weightingscheme weights >. =1

12 1. Can subjects average pricesetting behavior be described by the Calvo model?. 2. Istheremyopicbehavior? 3. Dosubjectsusepastinformation?

13 t, tj..

14 Table1:Summaryoftreatments =0.3 =0.3=0.7

16 Figure1:Timeseriesofdesiredpriceswithandwithouttrend Period Desired prices (p*) of the No Trend treatments Desired prices (p*) of the Trend treatments =0.3=0.7). =0.7

17 Figure2:Theoreticalweightsimpliedbytheprobabilitiesused Period ahead of t Weights for =.70 Weights for =.30 t

19 q x qx q

20 Figure3:Optimal,desiredandsetpricesinthebenchmarktreatment Period Desired prices (p*) Optimal prices (z*) Set prices (z)

21 i

22 Table2:Estimatedweightsofthedesiredpriceswith=0.3 (1) j italicsbold (1) j

23 Table3:Estimatedweightsofthedesiredpriceswith=0.7 (1) j italicsbold (1) j =0.3 =0.7 =0.3.

24 Figure4:Optimal,desiredandsetpricesintreatment Period Desired prices (p*) Optimal prices (z*) Set prices (z)

25 n i n i =0.3

26 Table4:Meanratiosofacquiredfuturepricestosetprices Allsubjects Median Ignorantsubjects Informedsubjects =0.3 =0.3 =0.3 =0.7 =0.3 n i n i

27 =0.7 =0.3

28 Table5:Estimatedweightsofthedesiredpricesofinformedandignorantsubjects intreatments2and4 Treatment2 Treatment4 (1) j italicsbold (1) j

29 Table6:Estimatedweightsofthedesiredpricesofinformedandignorantsubjects intreatments5and6 Treatment5 Treatment6 (1) j =0.3 =0.7 = (1) j italicsbold (1) j

30 j=0

31 3.

32 Table7:Biasandbackwardlookingbehavior =0.3 =0.3 =0.7 =0.3 =0.3 =0.3 =0.3 =0.7 = italicsbold 30

33 . =0.3 Table9:Estimatedstickinessparametersofalltreatmentswith=0.3

34 0= 1=1 0> 1<1 0=1 1=0 Table10:Classificationofsubjectsinalltreatments >

39 FigureA1:ScreenshotofthezTreeprogram FigureA2:ScreenshotofthezTreeprogramwithinformationcost

40 you you values Aslongasyouarenotallowedtosetanew value,youhavetosticktoyourpreviousvalue.probabilityp p cannotxq pqcannot qx optimalvalueifyouwereabletoreset yourvalueineachperiod. loss earning disproportionally p

41 current showupfee additional

42 TableC1:Observationspertreatment

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