Guidon Fenig, U.B.C.

Guidon Fenig, UBC, will present a seminar on May 20 at 10:30 am in the Timlin Room Arts 807. This is part of the Department of Economics Seminar Series.

Title: Asset Trading and Monetary Policy in Production Economies with Mariya Mileva and Luba Petersen.

Abstract

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. In a between-subject design, we compare how decisions and aggregate dynamics respond to the presence of an asset market, and to leverage constraints and asset price targeting policies intended to stabilize asset prices. We find that introducing asset markets to the economy does not generate significant real effects despite large deviations of asset prices from fundamental value. Both stabilization policies inadvertently generate larger deviations of asset prices from fundamental value. The prospect of a binding leverage constraint results in increased labor supply and, consequently, larger cash balances that fuel larger and more persistent asset price deviations. A "leaning against the wind'" interest rate policy generates low nominal interest rates in early periods of subjects' lifecycles because of its relatively weaker response to output price inflation. Low interest rates incentivize subjects to speculate and generate a quick acceleration in asset prices. As interest rates rise quickly and significantly in response to asset price inflation, monetary policy becomes more salient and effective at stabilizing asset demand.

This is part of the Department of Economics Seminar Series.