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This paper presents experimental evidence that quantitative easing can be effective in raising bond prices even if bonds and cash are perfect substitutes and the path of interest rates is fixed. Despite knowing the fundamental value of bonds, participants in the experiment believed that bond prices would exceed this value when they knew that a central bank would buy a large fraction of the market in a quantitative easing operation. By contrast, there was no average deviation of prices from fundamentals when trading only occurred between participants themselves.
From:
Adrian Penalver
Banque de France
Nobuyuki Hanaki
Université Nice Sophia Antipolis
Eizo Akiyama
University of Tsukuba
Yukihiko Funaki
Ryuichiro Ishikawa5
University of Waseda
This paper presents experimental evidence that quantitative easing can be effective in raising bond prices even if bonds and cash are perfect substitutes and the path of interest rates is fixed. Despite knowing the fundamental value of bonds, participants in the experiment believed that bond prices would exceed this value when they knew that a central bank would buy a large fraction of the market in a quantitative easing operation. By contrast, there was no average deviation of prices from fundamentals when trading only occurred between participants themselves.
From:
Adrian Penalver
Banque de France
Nobuyuki Hanaki
Université Nice Sophia Antipolis
Eizo Akiyama
University of Tsukuba
Yukihiko Funaki
Ryuichiro Ishikawa5
University of Waseda