Regional price levels in Germany

Cross-sectional evidence on price levels is scarce in all countries. However, several studies suggest that considerable differences in price levels within countries exist, which has obvious welfare implications. I use a sample of price levels in 50 German cities in 1993 to analyze the determinants of inter-city price level differentials. The most important factors driving price level differentials are population size and the average wage level. Using this information, I predict the price levels in all 440 German districts and aggregate them to the state level. On the state level I find convergence of the price levels to a common mean, but at a very low speed. The estimated half-life is about 15 years.

The New Keynesian Phillips Curve with Myopic Agents

Empirical estimations of the New Keynesian Phillips curve support hybrid versions with a positive weight on lagged infl ation and a weight less than one on expected infl ation. We argue that myopic price setting of some agents explains the low weight on expected infl ation. 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.Hybrid Phillips curve; experimental economics; myopia; behavioral macroeconomics

Are Expectations Formed by the Anchoring-and-adjustment Heuristic? – An Experimental Investigation

Previous experimental investigations have shown that expectations are not perfectly rational due to bias. Traditional adaptive models, however, in many cases do not perfectly describe the formation of expectations either. This paper makes two contributions to the experimental literature on the formation of expectations: First, we investigate whether subjects who have more information about the economic model than in previous studies also form biased expectations. Second, we argue that in some cases macroeconomic expectations might be formed by the anchoring-and-adjustment heuristic, which is well known in psychology. We find that subjects’ expectations are biased although the design might be more favorable to rational expectations.The anchoring- and-adjustment model of expectations gets some support by our data, but the best model encompasses both the anchoring-and-adjustment model and the traditional adaptive model.Expectations, heuristics, beliefs, mental models, macroeconomic experiment

As if or What? – Expectations and Optimization in a Simple Macroeconomic Environment

In this paper we report the results of a laboratory experiment, in which we observed the behavior of agents in a simple macroeconomic setting. The structure of the economy was only partially known to the players which is a realistic feature of our experiment. We investigate whether subjects manage to approach optimal behavior even if they lack important information. Furthermore, we analyze subjects’ perceptions of the model and whether their behavior is consistent with their perceptions. The full information model predicts changes of employment correctly, but not the level of employment. In the aggregate, subjects have correct perceptions, although individual perceptions are biased.We finally show that deviations from the full information solution are due to optimization failures than than misperceptions.Methodology, macroeconomic experiment, perceptions, optimization, expectations

Money or morality:fairness ideals in unstructured bargaining

We augment the Nash bargaining solution by fairness ideals in order to predict the outcomes of unstructured bargaining after the individual production of a joint surplus. If production depends on individual effort, talent, and luck, fairness ideals might be based on the accountability principle. In a lab experiment with real production and unstructured bargaining, we investigate subjects’ fairness ideals, their bargaining behaviour, and the outcomes of the bargaining process. As impartial spectators, about 75% of the subjects hold meritocratic or libertarian fairness ideals. However, these ideals do not affect their bargaining behaviour which is strongly opportunistic. Therefore the fairness-augmented Nash solution with opportunistic fairness ideals predicts the bargaining outcome best

Willingness to consume and ability to consume

George Katona (1960) introduced the distinction between ability to buy and willingness to buy. Ability to buy refers to the objective factors determining actual purchases whereas willingness to buy captures subjective factors such as attitudes or moods. I show that Katona's theory can be reconciled easily with standard models of intertemporal utility maximization if one allows for a time-varying preference parameter that is exogenous to the consumer and determined by the social environment. Such a willingness-to-consume model is tested against standard alternatives using data from seven European countries. The empirical evidence rejects the permanent income hypothesis and supports the willingness-to-consume model.

Predicting the macroeconomic effects of abstract and concrete events

This paper presents experimental evidence that non-experts do not distinguish between macroeconomically relevant and irrelevant events in the way economic theory would suggest. Students were asked to predict the likely consequences of several events in fictitious newspaper reports on GDP, inflation, unemployment, and aggregate sales. They overestimate the effects of irrelevant events, especially if those events are easy to imagine. The magnitudes of the predicted effects are clearly related to the concreteness of the events. The results are compatible with the use of the availability heuristic in the process of forming economic expectations.

Die makroökonomischen Wirkungen diskretionärer Fiskalpolitik in Deutschland - Was wissen wir empirisch?

This article surveys the empirical literature on the effects of discretionary fiscal policy on the German macroeconomy. Although the qualitative and quantitative effects of fiscal policy are often discussed among politicians and in the public, economists only recently renewed their interest in this topic and have produced only few empirical studies for Germany so far. While older macroeconometric models generally predict positive effects of expansionary policies on output in the short run, newer SVAR studies disagree on the direction of the expected effects. There is, however, some agreement that the effects are likely to be small. Copyright 2007 die Autoren Journal compilation 2007, Verein für Socialpolitik und Blackwell Publishing Ltd.