The Economic Costs of US Stock Mispricing

Gordon Menzies, Ron Bird, Peter Dixon and Maureen Rimmer

Centre of Policy Studies/IMPACT Centre Working Papers from Victoria University, Centre of Policy Studies/IMPACT Centre

Abstract: The USAGE model for the United States is used to quantify economic costs due to stock mispricing, made operational by shocking Tobin's q. The simulations quantify a potentially large impact even in the most favorable environment, where export demand holds up, and, the dollar is pro cyclical. A two year investment boom in two sectors increases consumption by a Net Present Value (NPV) amount of nearly one per cent, due to a positive investment externality onto the US terms of trade. If the investment is wasted, however, the consumption loss is nearly one half of a per cent. A 5 year 'capital strike' across the whole economy subsequent to the boom - mimicking financial distress from a burst bubble - shaves around 10 per cent off consumption.

Keywords: Financial crises; exchange rates; macroeconomic modeling; stock market (search for similar items in EconPapers)
JEL-codes: C50 F41 G01 (search for similar items in EconPapers)
Date: 2010-07
New Economics Papers: this item is included in nep-fmk
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Published in Journal of Policy Modeling, Elsevier, vol. 33(4), pages 552-567, July 2010.

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Related works:
Journal Article: The economic costs of US stock mispricing (2011)
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