Sentiments, Financial Markets, and Macroeconomic Fluctuations / Jess Benhabib, Xuewen Liu, Pengfei Wang.

Format:

Book

Author/Creator:

Benhabib, Jess.

Contributor:

National Bureau of Economic Research.

Liu, Xuewen.

Wang, Pengfei.

Series:

Working Paper Series (National Bureau of Economic Research) no. w21294.

NBER working paper series no. w21294

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2015.

Summary:

This paper studies how financial information frictions can generate sentiment-driven fluctuations in asset prices and self-fulfilling business cycles. In our model economy, exuberant financial market sentiments of high output and high demand for capital increase the price of capital, which signals strong fundamentals of the economy to the real side and consequently leads to an actual boom in real output and employment. The model further derives implications for asymmetric non-linear asset prices and for economic contagion and co-movement across countries. In the extension to the dynamic OLG setting, our model demonstrates that sentiment shocks can generate persistent output, employment and business cycle fluctuations, and offers some new implications for asset prices over business cycles.

Notes:

Print version record

June 2015.