Hennequin, M. and Hommes, C. (2024). Managing Bubbles in Experimental Asset Markets with Monetary Policy Journal of Money, Credit and Banking, 56(2-3):429--454.
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Affiliated authorsMyrna Hennequin, Cars Hommes
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Publication year2024
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JournalJournal of Money, Credit and Banking
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.