Limited rationality and strategic interaction: The impact of the strategic environment on nominal Inertia

Econometrica

Volumn 76, Issue 2, 2008, Pages 353-394

  Fehr, Ernst ^a,b   Tyran, Jean Robert ^c  

^a UNIVERSITY OF ZURICH   (Switzerland)

^b Swiss Federal Institute of Technology Collegium Helveticum   (Switzerland)

^c UNIVERSITY OF COPENHAGEN   (Denmark)

Author keywords

Anchoring; Bounded rationality; Money illusion; Nominal rigidity; Sticky prices; Strategic complements; Strategic substitutes

Indexed keywords

EID: 39349083917     PISSN: 00129682     EISSN: 14680262     Source Type: Journal    
DOI: 10.1111/j.1468-0262.2008.00836.x     Document Type: Article

References (68)

1. Akerlof, G. A., and J. L. Yellen (1985 A Near-Rational Model of the Business Cycle, With Wage and Price Inertia Quarterly Journal of Economics, 100, 823 838.
2. Andreoni, J. (1988 Why Free Ride? Strategies and Learning in Public Goods Experiments Journal of Public Economics, 37, 291 304.
3. Ariely, D., G. Loewenstein, and D. Prelec (2003 Coherent Arbitrariness Quarterly Journal of Economics, 118, 73 105.
4. Ball, L., and D. H. Romer (1991 Sticky Prices as a Coordination Failure American Economic Review, 81, 539 552.
5. Basu, S., S. Markov, and L. Shivakumar (2006 Systematic Errors in Analysts' Forecasts: Evidence From Analysts' Use of Inflation Information Mimeo, Emory University.
6. Blinder, A. S., E. D. Canetti, D. E. Lebow, and J. B. Rudd (1998 Asking About Prices. A New Approach to Understanding Price Stickiness. New York : Russell Sage Foundation.
7. Brock, W. A., and C. H. Hommes (1997 A Rational Route to Randomness Econometrica, 65, 1059 1095.
8. Brunnermeier, M. K., and C. Julliard (2008 Money Illusion and Housing Frenzies Review of Financial Studies, forthcoming.
9. Bryant, J. (1983 A Simple Rational-Expectations Keynes-Type Model Quarterly Journal of Economics, 98, 525 528.
10. Camerer, C. F. (1987 Do Biases in Probability Judgment Matter in Markets? Experimental Evidence American Economic Review, 77, 981 997.
11. Camerer, C. F. (1995 Individual Decision Making in Handbook of Experimental Economics, ed. by J. H. Kagel and A. E. Roth. Princeton, NJ : Princeton University Press, 3 109.
12. Camerer, C. F. (2003 Behavioral Game Theory - Experiments in Strategic Interaction. Princeton, NJ : Princeton University Press.
13. Camerer, C. F., and R. M. Hogarth (1999 The Effect of Financial Incentives in Experiments: A Review and Capital-Labor-Production Framework Journal of Risk and Uncertainty, 19, 7 42.
14. Camerer, C. F., T.-H. Ho, and J.-K. Chong (2004 A Cognitive Hierarchy Model of Games Quarterly Journal of Economics, 119, 861 898.
15. Cohen, R. B., C. Polk, and T. Vuolteenaho (2005 Money Illusion in the Stock Market Quarterly Journal of Economics, 120, 639 668.
16. Cooper, R. W. (1999 Coordination Games. Complementarities and Macroeconomics. Cambridge, U.K. : Cambridge University Press.
17. Cooper, R. W., and J. Haltiwanger (1993 Automobiles and the National Industrial Recovery Act: Evidence on Industry Complementarities Quarterly Journal of Economics, 108, 1043 1071.
18. Cooper, R. W., and J. Haltiwanger (1996 Evidence on Macroeconomic Complementarities Review of Economics and Statistics, 78, 78 93.
19. Costa-Gomes, M., and V. P. Crawford (2006 Cognition and Behavior in Two-Person Guessing Games: An Experimental Study American Economic Review, 96, 1737 1768.
20. Costa-Gomes, M., V. P. Crawford, and B. Broseta (2001 Cognition and Behavior in Normal-Form Games: An Experimental Study Econometrica, 69, 1193 1235.
21. Crawford, V. P. (1997 Theory and Experiment in the Analysis of Strategic Interaction in Advances in Economics and Econometrics: Theory and Applications, Seventh World Congress, ed. by D. Kreps and K. Wallis. Cambridge, U.K. : Cambridge University Press, 206 242.
22. Croson, R. (1995 Partners and Strangers Revisited Economics Letters, 53, 25 32.
23. Diamond, P. A. (1982 Aggregate Demand Management in Search Equilibrium Journal of Political Economy, 90, 881 894.
24. Epley, N., and T. Gilovich (2001 Putting Adjustment Back in the Anchoring and Adjustment Heuristic: Differential Processing of Self-Generated and Experimenter-Provided Anchors Psychological Science, 12, 391 396.
25. Epley, N., and T. Gilovich (2004 Are Adjustments Insufficient? Personality and Social Psychology Bulletin, 30, 447 460.
26. Evans, G. W., and S. Honkapohja (2001 Learning and Expectations in Macroeconomics. Princeton, NJ : Princeton University Press.
27. Evans, G. W., and G. Ramey (1992 Expectation Calculation and Macroeconomics Dynamics American Economic Review, 82, 207 224.
28. Evans, G. W., and G. Ramey (1998 Calculation, Adaptation and Rational Expectations Macroeconomic Dynamics, 2, 156 182.
29. Fehr, E., and U. Fischbacher (2002 Why Social Preferences Matter - The Impact of Non-Selfish Motives on Competition, Cooperation and Incentives Economic Journal, 112, C1 C33.
30. Fehr, E., and J.-R. Tyran (2001 Does Money Illusion Matter? American Economic Review, 91, 1239 1262.
31. Fehr, E., and J.-R. Tyran (2002 Limited Rationality and Strategic Interaction - The Impact of the Strategic Environment on Nominal Inertia Working Paper 130, Institute for Empirical Research in Economics, University of Zurich, available at http://www.iew.uzh.ch/wp/iewwp130.pdf.
32. Fehr, E., and J.-R. Tyran (2005 Individual Irrationality and Aggregate Outcomes Journal of Economic Perspectives, 19, 43 66.
33. Fehr, E., and J.-R. Tyran (2007 Money Illusion and Coordination Failure Games and Economic Behavior, 58, 246 268.
34. Fehr, E., and J.-R. Tyran (2008 Supplement to 'Limited Rationality and Strategic Interaction: The Impact of the Strategic Environment on Nominal Inertia' Econometrica Supplementary Material, Vol. 76,.
35. Fischbacher, U. (2007 z-Tree: Zürich Toolbox for Readymade Economic Experiments Experimental Economics, 10, 171 178.
36. Fischbacher, U., S. Gächter, and E. Fehr (2001 Are People Conditionally Cooperative? Evidence From a Public Goods Experiment Economics Letters, 71, 397 404.
37. Fischer, S. (1977 Long-Term Contracts, Rational Expectations, and the Optimal Money Supply Rule Journal of Political Economy, 85, 191 205.
38. Gode, D. K., and S. Sunder (1993 Allocative Efficiency of Markets With Zero-Intelligence Traders: Markets as a Partial Substitute for Individual Irrationality Journal of Political Economy, 101, 119 137.
39. Gneezy, U., A. Kapteyn, and J. Potters (2003 Evaluation Periods and Asset Prices in a Market Experiment Journal of Finance, 58, 821 838.
40. Haltiwanger, J., and M. Waldman (1985 Rational Expectations and the Limits of Rationality: An Analysis of Heterogeneity American Economic Review, 75, 326 340.
41. Haltiwanger, J., and M. Waldman (1989 Limited Rationality and Strategic Complements: The Implications for Macroeconomics Quarterly Journal of Economics, 104, 463 484.
42. Heemeijer, P., C. H. Hommes, J. Sonnemans, and J. Tuinstra (2006 Price Stability and Volatility in Markets With Positive and Negative Expectations Feedback: An Experimental Investigation Mimeo, University of Amsterdam.
43. Ho, T.-H., C. F. Camerer, and K. Weigelt (1998 Iterated Dominance and Iterated Best Response in Experimental p-Beauty Contests American Economic Review, 88, 947 969.
44. Howitt, P. (1989 Money Illusion in Money, ed. by J. Eatwell, M. Millgate, and P. Newman. New York : Norton, 244 247.
45. Howitt, P. (2002 Looking Inside the Labor Market: A Review Article Journal of Economic Literature, 40, 125 138.
46. Kahneman, D., and A. Tversky (2000 Choices, Values, and Frames. New York : Cambridge University Press.
47. Kahneman, D., P. Slovic, and A. Tversky (1982 Judgment Under Uncertainty: Heuristics and Biases. Cambridge, U.K. : Cambridge University Press.
48. Kooreman, P., R. P. Faber, and H. M. Hofmans (2004 Charity Donations and the Euro Introduction: Some Quasi-Experimental Evidence on Money Illusion Journal of Money, Credit, and Banking, 36, 1121 1224.
49. Lucas, R. E., Jr. (1972 Expectations and the Neutrality of Money Journal of Economic Theory, 4, 103 124.
50. Mankiw, N. G. (1985 Small Menu Costs and Large Business Cycles: A Macroeconomic Model of Monopoly Quarterly Journal of Economics, 100, 529 538.
51. Mankiw, N. G., and R. Reis (2002 Sticky Information versus Sticky Prices - A Proposal to Replace the New Keynesian Phillips Curve Quarterly Journal of Economics, 117, 1295 1328.
52. Nagel, R. (1995 Unraveling in Guessing Games: An Experimental Study American Economic Review, 85, 1313 1326.
53. Oh, S., and M. Waldman (1990 The Macroeconomic Effects of False Announcements Quarterly Journal of Economics, 105, 1017 1034.
54. Potters, J., and S. Suetens (2005 Strategic Interaction, Externalities and Cooperation: Experimental Evidence Mimeo, Tilburg University.
55. Reis, R. (2006 Inattentive Producers Review of Economic Studies, 73, 793 821.
56. Romer, D. H. (2001 Advanced Macroeconomics. New York : McGraw-Hill.
57. Russell, T., and R. H. Thaler (1985 The Relevance of Quasi Rationality in Competitive Markets American Economic Review, 75, 1071 1082.
58. Sargent, T. J. (1993 Bounded Rationality in Macroeconomics. London : Oxford University Press.
59. Shafir, E., P. A. Diamond, and A. Tversky (1997 Money Illusion Quarterly Journal of Economics, 112, 341 374.
60. Smith, V. L. (1962 An Experimental Study of Competitive Market Behavior Journal of Political Economy, 70, 111 137.
61. Smith, V. L. (1982 Microeconomic Systems as an Experimental Science American Economic Review, 72, 923 955.
62. Strack, F., and T. Mussweiler (1997 Explaining the Enigmatic Anchoring Effect: Mechanisms of Selective Accessibility Journal of Personality and Social Psychology, 73, 437 446.
63. Taylor, J. B. (1979 Staggered Wage Setting in a Macro Model American Economic Review, 69, 108 113.
64. Tversky, A., and D. Kahneman (1974 Judgment Under Uncertainty: Heuristics and Biases Science, 185, 1124 1130.
65. Tyran, J.-R. (2007 Money Illusion and the Market Science, 314, 1042 1043.
66. Weitzman, M. (1982 Increasing Returns and the Foundations of Unemployment Theory Economic Journal, 92, 787 804.
67. Weizsäcker, G. (2003 Ignoring the Rationality of Others: Evidence From Experimental Normal-Form Games Games and Economic Behavior, 44, 145 171.
68. Woodford, M. (2002 Imperfect Common Knowledge and the Effects of Monetary Policy in Knowledge, Information, and Expectations in Modern Macroeconomics: In Honor of Edmund S. Phelps, ed. by P. Aghion, R. Frydman, J. Stiglitz, and M. Woodford. Princeton, NJ : Princeton University Press, 25 58.