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Working papers

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Self Confidence Spillovers and Motivated Beliefs

Ritwik Banerjee, Nabanita Datta Gupta, Marie Claire Villeval , Working paper GATE 2018-06
Is success in a task used strategically by individuals to motivate their beliefs prior to taking action in a subsequent, unrelated, task ? Also, is the distortion of beliefs reinforced for individuals who have lower status in society ? Conducting an artefactual field experiment in India, we show that success when competing in a task increases the performers’ self-confidence and competitiveness in the subsequent task. We also find that such spillovers affect the self-confidence of low-status individuals more than that of high-status individuals. Receiving good news under Affirmative Action, however, boosts confidence across tasks regardless of the caste status.

Monetary Policy obeying the Taylor Principle Turns Prices into Strategic Substitutes

Camille Cornand, Frank Heinemann, Working paper GATE 2018-05
Monetary policy affects the degree of strategic complementarity in firms’ pricing decisions if it responds to the aggregate price level. In normal times, when monopolistic competitive firms increase their prices, the central bank raises interest rates, which lowers consumption demand and creates an incentive for firms to reduce their prices. Thereby, monetary policy reduces the degree of strategic complementarities among firms’ pricing decisions and even turns prices into strategic substitutes if the effect of interest rates on demand is sufficiently strong. We show that this condition holds when monetary policy follows the Taylor principle. By contrast, in a liquidity trap where monetary policy is restricted by the zero lower bound, pricing decisions are strategic complements. Our main contribution consists in relating the determinacy and stability of equilibria to strategic substitutability in prices. We discuss the consequences for dynamic adjustment processes and some policy implications.