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Asset Trading and Monetary Policy in Production Economies

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Abstract

This paper studies the effects of monetary policy on asset trading and production in a laboratory economy. Participants play the role of household investors who make consumption, labor, and investment decisions. Introducing asset markets to the economy does not generate significant real effects. Prohibiting borrowing for speculation leads to increased precautionary saving through higher, more stable labor supply and smaller bubbles, but increases asset price volatility. In contrast, a “leaning against the wind" interest rate policy decreases labor supply but effectively stabilizes asset prices and reduces overall deviations from fundamentals. Indebtedness is an important source of heterogeneity driving participants decisions.

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File URL: http://www.sfu.ca/econ-research/RePEc/sfu/sfudps/dp13-08.pdf
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Bibliographic Info

Paper provided by Department of Economics, Simon Fraser University in its series Discussion Papers with number dp13-08.

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Length: 41
Date of creation: Sep 2013
Date of revision: Aug 2014
Handle: RePEc:sfu:sfudps:dp13-08

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Postal: Department of Economics, Simon Fraser University, 8888 University Drive, Burnaby, BC, V5A 1S6, Canada
Phone: (778)782-3508
Fax: (778)782-5944
Web page: http://www.sfu.ca/economics.html
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Postal: Working Paper Coordinator, Department of Economics, Simon Fraser University, 8888 University Drive, Burnaby, BC, V5A 1S6, Canada
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Web: http://www.sfu.ca/economics/research/publications.html

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Keywords: Experimental macroeconomics; laboratory experiment; monetary policy; asset price bubbles; general equilibrium; production economy; debt aversion;

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References

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  20. Ernan Haruvy & Charles N. Noussair, 2006. "The Effect of Short Selling on Bubbles and Crashes in Experimental Spot Asset Markets," Journal of Finance, American Finance Association, American Finance Association, vol. 61(3), pages 1119-1157, 06.
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Cited by:
  1. Thomas Meissner, 2013. "Intertemporal Consumption and Debt Aversion:An Experimental Study," SFB 649 Discussion Papers, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany SFB649DP2013-045, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  2. Giovanni Giusti & Janet Hua Jiang & Yiping Xu, 2014. "Interest on Cash, Fundamental Value Process and Bubble Formation on Experimental Asset Markets," Working Papers, Bank of Canada 14-18, Bank of Canada.

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