Experimental Economics· 2026Q1
History-dependent monetary policy: a lab experiment and a HENK model
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- Q1SCImago
- 2026year
Short summary
Price-level targeting (PLT) is theoretically optimal but not implemented; this study shows it fails to reduce volatility vs. inflation targeting (IT) without explicit inflation guidance, even in a sophisticated model, because agents cannot learn the history-dependent path.
AI-generated from the title and abstract; the full text is not read.
Key points
- Price-level targeting (PLT) did not reduce macroeconomic volatility compared to inflation targeting (IT) in lab experiments and a HENK model.
- Agents (human and model-based) struggled to learn the history-dependent inflation path required for PLT effectiveness.
- PLT's benefits emerged only when augmented with explicit inflation guidance, minimizing the inflation gap.
- The HENK model successfully replicated experimental dynamics, offering a behavioral explanation for policy outcomes.
AI-generated from the title and abstract; the full text is not read.
Abstract
Abstract Price-level targeting (PLT) is theoretically optimal under the full information rational expectations (FIRE) benchmark but has not been implemented in practice. We use a laboratory experiment to collect data on expectations, inflation and output dynamics under a traditional inflation targeting (IT) framework and a PLT regime with both deflationary and cost-push shocks. A heterogeneous expectation New Keynesian (HENK) model with forward-looking communication can replicate the dynamics observed in the lab. We do not observe the benefits of PLT over IT because both human subjects and HENK agents are unable to learn the history-dependent inflation path, which results in excess macroeconomic volatility. However, once augmented with an inflation guidance consistent with closing the price gap, the advantage of PLT materializes, both in the lab and in the model, and the inflation gap is minimized no matter the type of shocks. The model offers a behavioral narrative for the cross-regime differences observed in the experiment. Combining laboratory data with the HENK framework is a promising addition to the central banks’ toolkit since it offers a first test of their policies.
The authors' abstract, as published at the source. Experimental Economics, 2026 · DOI ↗
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Field: General Economics, Econometrics and Finance
General Economics, Econometrics and FinanceEconomics, Econometrics and Finance