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

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