Earning inflation, real investment and self-fulfilling uncertainty

Bo Wang, Tiantian Hu and Suli Zheng

Finance Research Letters, 2023, vol. 58, issue PC

Abstract: We develop a model of informational interdependence between entrepreneurs and the real economy, linking economic uncertainty to entrepreneurs’ earning inflation. We show that information acquisition in the real economy discourages earning inflation. With a monopolistic competition structure, earning inflation could be self-fulling with two equilibria. In a dynamic setting, our model characterises self-fulfilling uncertainty traps with two steady-state equilibria transitional dynamics.

Keywords: Earning inflation; Information acquisition; Business cycle (search for similar items in EconPapers)
JEL-codes: G14 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:58:y:2023:i:pc:s1544612323008607

DOI: 10.1016/j.frl.2023.104488

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