Managing self-organization of expectations through monetary policy: A macro experiment

•We run laboratory experiments to test the effectiveness of the Taylor principle in pinning down inflation within the New Keynesian model.•We find that the Taylor principle is a necessary, but not sufficient condition for stability and uniqueness of the equilibrium path of inflation.•The conditions for stability and uniqueness of the equilibrium path of inflation relate to the existence of strong enough negative feedbacks induced by the monetary policy rule.•The central bank can achieve convergence to the targeted inflation by means of an aggressive monetary policy that increases the size of the negative feedback and prevents coordination on destabilizing trend-extrapolating forecasting rules. The New Keynesian theory of inflation determination is tested in this paper by means of laboratory experiments. We find that the Taylor principle is a necessary condition to ensure convergence to the inflation target, but it is not sufficient. Using a behavioral model of expectation formation, we show how heterogeneous expectations tend to self-organize on different forecasting strategies depending on monetary policy. Finally, we link the central bank’s ability to control inflation to the impact that monetary policy has on the type of feedback –positive or negative– between expectations and realizations of aggregate variables and in turn on the composition of subjects with respect to the type of forecasting rules they use.