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The impact of monetary policy on stock market bubbles and trading behavior: Evidence from the lab

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  • Fischbacher, Urs
  • Hens, Thorsten
  • Zeisberger, Stefan

Abstract

We investigate the effect of monetary policy on stock market bubbles and trading behavior in experimental asset markets. We introduce the possibility of investing in interest bearing bonds to the widely used laboratory asset market design of Smith et al. (1988). Treatment groups face a variable interest rate policy which depends on asset prices, while control groups are subjected to a constant interest rate. We observe a strong impact of our interest rate policy on liquidity in the stock market but only a small impact on bubbles. However, we find that announcing the possibility of reserve requirements significantly reduces bubbles.

Suggested Citation

  • Fischbacher, Urs & Hens, Thorsten & Zeisberger, Stefan, 2013. "The impact of monetary policy on stock market bubbles and trading behavior: Evidence from the lab," Journal of Economic Dynamics and Control, Elsevier, vol. 37(10), pages 2104-2122.
    • Handle: RePEc:eee:dyncon:v:37:y:2013:i:10:p:2104-2122
    DOI: 10.1016/j.jedc.2013.04.004
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    More about this item

    Keywords

    Experimental economics; Investment behavior; Liquidity; Monetary policy; Asset market bubbles;
    All these keywords.

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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