Asset Trading and Monetary Policy in Production Economies

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.