Frictions in an Experimental Dynamic Stochastic General Equilibrium Economy

Abstract

We construct experimental economies, populated with human subjects, with different institutional features that have a structure and incentives similar to a dynamic stochastic general equilibrium model. An experimental economy with monopolistic competition and no menu costs generates empirical patterns that are closer to the U.S. economy than simulations or the other experimental environments. We observe greater welfare and output in a setting where goods are perfect substitutes compared to treatments with monopolistic competition. Discretionary human central bankers produce lower output and welfare compared to an automated instrumental rule. Menu costs reduce inflation volatility.