Deflating asset price bubbles with leverage constraints and monetary policy

Guidon Fenig, Mariya Mileva () and Luba Petersen
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Mariya Mileva: California State University Long Beach, http://www.ifw-kiel.de/

Discussion Papers from Department of Economics, Simon Fraser University

Abstract: This paper studies the interaction of labor, goods, and asset markets in experimental macroeconomies populated by household investors. We analyze the aggregate effects of two different policies intended to stabilize asset prices: leverage constraints and a `leaning against the wind' monetary policy that raises interest rates in response to asset price inflation. We find that introducing a leverage constraint significantly reduces asset prices when the constraint actually binds. Households often circumvent these constraints by excessively supplying labor and generating increased wealth which can be used for speculation. As a result, asset price deviations are significantly higher under a policy regime of leverage constraints. Raising interest rates according to a `leaning against the wind' policy effectively contracts asset prices with minimal impact on production. Our experimental findings suggest that asset inflation targeting is more effective than leverage constraints at stabilizing asset price.

Keywords: Experimental macroeconomics; laboratory experiment; monetary policy; asset price bubbles; general equilibrium; production economy (search for similar items in EconPapers)
JEL-codes: C92 D91 E21 E52 (search for similar items in EconPapers)
Pages: 55
Date: 2013-09, Revised 2017-01
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Citations: View citations in EconPapers (1)

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Journal Article: Deflating asset price bubbles with leverage constraints and monetary policy (2018)
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