EconPapers    
Economics at your fingertips  
 

Monetary policy and asset price bubbles: a laboratory experiment

Jordi Galí (), Giovanni Giusti and Charles Noussair
Additional contact information
Jordi Galí: https://www.upf.edu/web/econ/faculty/-/asset_publisher/6aWmmXf28uXT/persona/id/3418866

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

Abstract: 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.

Date: 2020-05
New Economics Papers: this item is included in nep-exp and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
https://econ-papers.upf.edu/papers/1726.pdf Whole Paper (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:upf:upfgen:1726

Access Statistics for this paper

More papers in Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra
Bibliographic data for series maintained by ().

 
Page updated 2020-09-25
Handle: RePEc:upf:upfgen:1726