The Macroeconomics of Financial Speculation

Alp ÅžimÅŸek

No 15733, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: I review the literature on financial speculation driven by belief disagreements from a macroeconomics perspective. To highlight unifying themes, I develop a stylized macroeconomic model that embeds several mechanisms. With short-selling constraints, speculation can generate overvaluation and speculative bubbles. Leverage can substantially inflate speculative bubbles and leverage limits depend on perceived downside risks. Shifts in beliefs about downside tail scenarios can explain the emergence and the collapse of leveraged speculative bubbles. Speculative bubbles are related to rational bubbles, but they match better the empirical evidence on the predictability of asset returns. Even without short-selling constraints, speculation induces procyclical asset valuation. When speculation affects the price of aggregate assets, it also influences macroeconomic outcomes such as aggregate consumption, investment, and output. Speculation in the boom years reduces asset prices, aggregate demand, and output in the subsequent recession. Macroprudential policies that restrict speculation in the boom can improve macroeconomic stability and social welfare.

Keywords: Financial speculation; Belief disagreements; Short selling; Leverage; Speculative bubbles; Rational bubbles; Countercyclical risk premium; Business cycles; Aggregate demand recessions; Macroprudential policy (search for similar items in EconPapers)
JEL-codes: E00 E12 E21 E22 E32 E44 E52 E70 G00 G01 G11 G12 G40 (search for similar items in EconPapers)
Date: 2021-01
New Economics Papers: this item is included in nep-cba, nep-cwa, nep-mac and nep-pke
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

Downloads: (external link)
https://cepr.org/publications/DP15733 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:15733

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP15733

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().