Managing bubbles in experimental asset markets with monetary policy

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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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

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