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Managing Bubbles in Experimental Asset Markets with Monetary Policy

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  • MYRNA HENNEQUIN
  • CARS HOMMES

Abstract

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.

Suggested Citation

  • Myrna Hennequin & Cars Hommes, 2024. "Managing Bubbles in Experimental Asset Markets with Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 56(2-3), pages 429-454, March.
    • Handle: RePEc:wly:jmoncb:v:56:y:2024:i:2-3:p:429-454
    DOI: 10.1111/jmcb.13050
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