This paper characterizes the monetary equilibria of an economy with commodity and labour contracts. If government policy is not “too variable,” there may exist an equilibrium with predetermined wages and prices. In this equilibrium, observed changes in the money supply to finance government purchases have persistent real effects. The paper also provides theoretical support for an inverse relationship between the degree of indexation in contracts and the persistence of policy effects.

We study the selection of an equilibrium for coordination games: symmetric, simultaneous move, complete information games which have multiple, Pareto-ranked Nash equilibria. We design and experiment to explore regularities in the observed outcomes for this class of games. With replication, we find that the Nash equilibrium concept accurately predicts the strategies chosen by players in these games. However, the equilibrium outcome is not always the Pareto-dominant equilibrium so that coordination failures can arise. Moreover, we find that altering the payoffs of a dominated strategy can influence the selection of a Nash equilibrium. Our results are consistent with a modified version of Harsanyi's tracing procedure in which players initially place some positive probability that their opponent is a cooperative player even though the cooperative strategy may be dominated by another strategy.

This paper contrasts the dynamic properties of an imperfectly competitive economy with a representative agent, real business cycle model. For both economies, inventories are the important dynamic linkage. The predictions of these models with regards to the comovement of employment across sectors may differ. Empirical evidence on the comovement of employment over the business cycle is consistent with the model of imperfect competition with inventory holdings.

In this study, the authors report the results from laboratory asset markets designed to test the rational expectations hypothesis that markets aggregate and transmit the information of differentially informed traders. After documenting evidence in favor of the rational expectations model, they examine which features of their environment are necessary or sufficient to achieve an rational expectations equilibrium. The authors find that trading experience and common knowledge of dividends are jointly sufficient to achieve a rational expectations equilibrium, but that neither is a sufficient condition by itself. They also present some stylized facts about the convergence process leading to a rational expectations equilibrium.