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Balancing the current account: experimental evidence on underconsumption

Published online by Cambridge University Press:  14 March 2025

Marcus Giamattei and
Johann Graf Lambsdorff
Marcus Giamattei*
Affiliation:
University of Passau, Innstrasse 27, 94032 Passau, Germany
Johann Graf Lambsdorff*
Affiliation:
University of Passau, Innstrasse 27, 94032 Passau, Germany
*
marcus.giamattei@uni-passau.de
jlambsd@uni-passau.de
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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.

Keywords

Beauty contestCurrent account imbalanceWhite PlanKeynes PlanDeflationary biasLevel-k reasoningEurozone

JEL classification

F32: Current Account Adjustment • Short-Term Capital MovementsE12: Keynes • Keynesian • Post-KeynesianC92: Laboratory, Group Behavior

Information

Type
Original Paper
Information
Experimental Economics , Volume 18 , Issue 4 , December 2015, pp. 670 - 696
Copyright
Copyright © 2014 Economic Science Association

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Footnotes

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.

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