Hennequin, Myrna and Hommes, Cars (2023) Managing bubbles in experimental asset markets with monetary policy. Journal of Money, Credit and Banking. pp. 1-26. ISSN 0022-2879

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Abstract

We study the effect of a “leaning against the wind” monetary policy on asset price bubbles in a learning-to-forecast experiment, where prices are driven by the expectations of market participants. We find that a strong interest rate response is successful in preventing or deflating large price bubbles, while a weak response is not. Giving information about the interest rate changes and communicating the goal of the policy increases coordination of expectations and has a stabilizing effect. When the steady state fundamental price is unknown and the interest rate rule is based on a proxy instead, the policy is less effective.

Item Type:	Article
Keywords:	Experimental macroeconomics, Heterogeneous expectations, Asset price bubbles, Monetary policy
Schools and Departments:	University of Sussex Business School > Economics
SWORD Depositor:	Mx Elements Account
Depositing User:	Mx Elements Account
Date Deposited:	16 Aug 2022 09:18
Last Modified:	09 May 2023 13:25
URI:	http://sro.sussex.ac.uk/id/eprint/107420

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