The impact of interest rate policy on individual expectations and asset bubbles in experimental markets

• Main Authors: Bao, Te, Zong, Jichuan
• Other Authors: School of Social Sciences
• Format: Article
• Language: English
• Published: 2020
• Subjects: Social sciences::Economic theory; Interest Rate Policy; Asset Bubble
• Online Access: https://hdl.handle.net/10356/142772
• Institution: Nanyang Technological University

We run a learning-to-forecast experiment with an interest rate policy in which the interest rate will increase/lower sharply when the deviation of asset prices from the fundamental value moves above/below a threshold. Our results show that the average price deviation (“bubble”) is significantly lower in the treatments with the interest rate policy than in the baseline treatment without the policy. Additionally, our results suggest that the policy maintains its effectiveness regardless of whether the participants are informed about the policy objectives.