A Quantitative Easing Experiment

Abstract

We experimentally investigate the effect of a central bank buying bonds for cash in a quantitative easing (QE) operation. In our experiment, the bonds are perfect substitute for cash, and have a constant fundamental value (FV) which is not affected by QE in the rational expectations equilibrium. We found that QE raised the bond prices beyond those in the benchmark treatment without QE and these differences became larger as subjects gained experience. While subjects in the benchmark treatment learned to trade the bonds at its FV, those in treatments with QE became more convinced that QE boosts bond prices.