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The Impact of Interest Rate Policy on Individual Expectations and Asset Bubbles in Experimental Markets

Author

Listed:
  • Te Bao

    (Economics, School of Social Sciences, Nanyang Technological University, Singapore)

  • Jichuan Zong

    (Laboratory of Experimental Economics and School of Finance, Dongbei University of Finance and Economics)

Abstract
Previous literature in experimental finance finds little support for the effectiveness of interest rate policy in stabilizing asset price bubbles. We run a learning to forecast experiment with an interest rate policy that is strongly responsive to deviation of asset prices from the fundamental. Our result shows that the average price deviation is significantly lower in the treatments with the interest rate policy than in the baseline treatment without the policy. Our result also suggests that the policy is effective irrespective of whether or not the purpose of it is announced/explained to the participants.

Suggested Citation

  • Te Bao & Jichuan Zong, 2018. "The Impact of Interest Rate Policy on Individual Expectations and Asset Bubbles in Experimental Markets," Economic Growth Centre Working Paper Series 1802, Nanyang Technological University, School of Social Sciences, Economic Growth Centre.
    • Handle: RePEc:nan:wpaper:1802
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    File URL: http://www3.ntu.edu.sg/hss2/egc/wp/2018/2018-02.pdf
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    More about this item

    Keywords

    interest rate policy; asset bubble; experimental economics; learning to forecast experiment; behavioral finance;
    All these keywords.

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • C93 - Mathematical and Quantitative Methods - - Design of Experiments - - - Field Experiments
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • G01 - Financial Economics - - General - - - Financial Crises

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