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An experimental test of Taylor-type rules with inexperienced central bankers

Published online by Cambridge University Press:  14 March 2025

Jim Engle-Warnick  and
Nurlan Turdaliev
Jim Engle-Warnick*
Affiliation:
Department of Economics, McGill University, 855 Sherbrooke St. W., Montreal QC H3A 2T7, Canada
Nurlan Turdaliev*
Affiliation:
Department of Economics, 401 Sunset Avenue, University of Windsor, Windsor ON N9B 3P4, Canada
*
e-mail: jim.engle-warnick@mcgill.ca
e-mail: nurlan@uwindsor.ca
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Abstract

We experimentally test monetary policy decision making in a population of inexperienced central bankers. In our experiments, subjects repeatedly set the short-term interest rate for a computer economy with inflation as their target. A large majority of subjects learn to successfully control inflation by correctly putting higher weight on inflation than on the output gap. In fact, the behavior of these subjects meets a stability criterion. The subjects smooth the interest rate as the theoretical literature suggests they should in order to enhance stability of the uncertain system they face. Our study is the first to use Taylor-type rules as a framework to identify inflation weighting, stability, and interest-rate smoothing as behavioral outcomes when subjects try to achieve an inflation target.

Keywords

Monetary policyTaylor ruleExperimental economicsRepeated games

JEL classification

E42: Monetary Systems • Standards • Regimes • Government and the Monetary System • Payment Systems C91: Laboratory, Individual Behavior

Information

Type
Research Article
Information
Experimental Economics , Volume 13 , Issue 2 , June 2010 , pp. 146 - 166
Copyright
Copyright © Economic Science Association 2010

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Footnotes

Electronic supplementary material The online version of this article (http://dx.doi.org/10.1007/s10683-010-9233-9) contains supplementary material, which is available to authorized users.

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