Soft landing of a stock market bubble : An experimental study

The paper investigates the effect of interest rate policy on price bubbles, trading behavior, and portfolio choice in experimental stock markets. In a series of experiments, participants trade an asset over 15 periods. Alternatively, the participants can invest money in interest-bearing bonds. Treatment groups are subjected to an interest policy, while control groups experience a constant interest rate. We observe only a small but positive impact of our interest policy on bubbles. However, we find evidence for rational investment behavior concerning portfolio choice. Thus, direct measures to decrease liquidity seem preferable over interest rate policy