Asset Trading and Monetary Policy in Production Economies

This paper studies the effects of monetary policy on asset price bubbles 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 signifcant real effects. Restricting liquidity in asset markets by imposing borrowing constraints on 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 improves the salience of monetary policy. Output volatility is modestly reduced, asset prices are quickly stabilized and overall deviations from fundamentals are lower. Indebtedness is an important source of heterogeneity in participants' decisions.