The economic costs of US stock mispricing

R. Bird, Gordon Menzies, Peter Dixon and Maureen Rimmer
Authors registered in the RePEc Author Service: Ron Bird and Richard M. Bird

Journal of Policy Modeling, 2011, vol. 33, issue 4, 552-567

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. Given these significant costs associated with "boom" and "bust" equity markets, we consider some, policy options that might result in greater stability in these markets.

Keywords: Financial; crises; Exchange; rates; Macroeconomic; modeling; Stock; market (search for similar items in EconPapers)
Date: 2011
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Working Paper: The Economic Costs of US Stock Mispricing (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jpolmo:v:33:y:2011:i:4:p:552-567

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