Paper #1726

Títol:

Monetary policy and asset price bubbles: a laboratory experiment

Autors:

Jordi Galí, Giovanni Giusti i Charles N. Noussair

Data:

Maig 2020

Resum:

Advocates of a Leaning-Against-the-Wind monetary policy have claimed that such a policy can moderate asset price bubbles. On the other hand, there are compelling theoretical arguments that the policy would have the opposite effect. We study the effect of monetary policy on asset prices in a laboratory experiment with an overlapping generations structure. Participants in the role of the young generation allocate their endowment between two investments: a risky asset and a one-period riskless bond. The risky asset pays no dividend and thus capital gains are its only source of value. Consequently, its price is a pure bubble. We study how variations in the interest rate affect the evolution of the bubble in an experiment with three treatments. One treatment has a fixed low interest rate, another a fixed high interest rate, and the third has a Leaning-Againstthe-Wind interest rate policy in effect. We observe that the bubble increases (decreases) when interest rates are lower (higher) in the period of a policy change. However, the opposite effect is observed in the following period, when higher (lower) interest rates are associated with greater (smaller) bubble growth. Direct measurement of expectations reveals a Trend-Following component.

Àrea de Recerca:

Macroeconomia i Economia Internacional

Publicat a:

Journal of Economic Dynamics and Control 130, 2021, 1-15.

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