Economic Fluctuations and Pseudo-Wealth

Joseph Stiglitz

No 28415, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: What can explain the large changes in aggregate demand that occur in the absence of any seemingly corresponding shock to the underlying state variables of the economy? We show that macroeconomic volatility can arise from dispersions of beliefs among agents. These dispersions give rise to bets and other trades in speculative assets. Such trades give rise to pseudo-wealth, wealth that individuals believe they have on the basis of expectations of returns on these gambles. In the aggregate, when there are enough opportunities for trade and large enough dispersions in beliefs, this perceived wealth may be dangerously untethered from either market wealth or the real wealth of the economy. Given the increased dispersion in beliefs that naturally arises from unprecedented shocks, the theory of pseudo-wealth provides new understandings of both the origins of unanticipated fluctuations and their magnitude, markedly different from prevailing theories grounded in common knowledge and beliefs among individuals. This paper explores the empirical and theoretical underpinnings of pseudo-wealth, links the concept to observed macroeconomic fluctuations, and lays out a research agenda that might help us better understand the role of pseudo-wealth and the circumstances in which it is pronounced.

JEL-codes: B22 E03 E21 E44 E60 G01 G12 G18 (search for similar items in EconPapers)
Date: 2021-01
New Economics Papers: this item is included in nep-cwa, nep-mac and nep-pke
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Citations: View citations in EconPapers (4)

Published as Joseph E Stiglitz & Martin M Guzman, 2021. "Economic fluctuations and pseudo-wealth," Industrial and Corporate Change, vol 30(2), pages 297-315.

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Journal Article: Economic fluctuations and pseudo-wealth (2021)
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