Experimenting with Focal Points and Monetary Policy

Sammanfattning: This thesis consists of two parts. The first part uses economic experiments to investigate how participants choose to divide a surplus in the presence of competing focal points. The second part examines whether a monetary policy shock has asymmetric regional effects. Chapter 2 suggests a simple separation mechanism based on heterogeneity among subjects to understand how they choose equilibrium when there are competing focal points. In a Nash demand game where buyers and sellers bargain for a liter of milk, we find that some subjects choose to split the available surplus equally while others are sensitive to the frame and therefore choose the prevailing market price of the product. The choice of focal point seems to depend on subjects’ characteristics and how strong the frame is for the subject. Chapter 3 examines whether the focal point induced by a product is sensitive to experience. In a repeated Nash demand game where buyers and sellers bargain for a coca-cola, I find that a small difference in feedback affects whether average bids converge to equal-splits. When both parties can observe the opponent’s bid after each period, average bids do converge to equal-splits, but when the seller only learns if a transaction has taken place or not, average bids do not converge. Instead, around half of the subjects in this treatment stick to the prevailing market price of the product. This result remains when these sellers get to observe the buyer’s bid. The repeated choice of focal point is also affected by individual characteristics and how attached subjects are to the product. Chapter 4 investigates the effects on employment in 21 Swedish regions of a monetary policy shock using a VAR model with exogenous foreign variables for the 1993:1-2007:4 period. The regional impulse responses clearly indicate asymmetric effects in which employment falls significantly in some regions, while not changing significantly in others. These differences seem to stem from the interest and exchange rate channel, whereby regions with larger shares of employment in the goods sector and higher export intensity are adversely affected. In addition, there is one group of regions that, surprisingly, see increased employment in response to the same policy shock.