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Balancing the current account: experimental evidence on underconsumption
Published online by Cambridge University Press: 14 March 2025
Abstract
How should countries in a fixed exchange rate system balance their current account? This question was at the center of the historical debate between Keynes and White in 1944 and is being debated increasingly these days for the Eurozone. Should consolidation by deficit countries be complemented by higher spending in surplus countries in order to avoid a downward bias in the level of consumption? We investigate the associated disequilibrium behavior experimentally, letting our experimental subjects act as heads of state who repeatedly seek to coordinate their policies. If only deficits are punished, as proposed by White, we observe that consumption is persistently reduced and adjustment is slower than in a treatment in which a surplus is also punished, as suggested by Keynes. We find support for the fact that underconsumption occurs for behavioral but not for rational reasons.
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- Copyright © 2014 Economic Science Association
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Electronic supplementary material The online version of this article (doi:https://doi.org/10.1007/s10683-014-9422-z) contains supplementary material, which is available to authorized users.