A Classroom Inflation Uncertainty Experiment*

This classroom experiment uses a double oral auction credit market to demonstrate how inflation uncertainty causes a wealth transfer between borrowers and lenders.The experiment also shows the social cost of inflation uncertainty when borrowers and lenders cannot agree on a nominal interest rate that compensates each for their risk. In this case, the credit market fails to allocate funds to the highest-valued investment projects.The experiment provides hands-on experience with the effects of anticipated and unanticipated inflation, giving students a common background for a discussion of the economic costs of inflation. It can be used in principles,intermediate macroeconomics, money and banking, or financial economics courses, with 8–60 students. It takes approximately 50 minutes to run and requires no computers.The author gratefully acknowledges Jeffrey Parker’s help designing the inflation uncertainty experiment, and the funding provided by a grant from Will and Susanna Thomas and from the Sally Ann Abshire Research Scholar Award. She also thanks Noelwah Netusil for her helpful suggestions.