Macroeconomic and stock market interactions with endogenous aggregate sentiment dynamics

Peter Flaschel, Matthieu Charpe, Giorgos Galanis, Christian Proaño and Roberto Veneziani

Journal of Economic Dynamics and Control, 2018, vol. 91, issue C, 237-256

Abstract: This paper studies the implications of heterogeneous capital gain expectations on output and asset prices. We consider a disequilibrium macroeconomic model where agents’ expectations on future capital gains affect aggregate demand. Agents’ beliefs take two forms – fundamentalist and chartist – and the relative weight of the two types of agents is endogenously determined. We show that there are two sources of instability arising from the interaction of the financial with the real part of the economy, and from the heterogeneous opinion dynamics. Two main conclusions are derived. On the one hand, perhaps surprisingly, the non-linearity embedded in the opinion dynamics far from the steady state can play a stabilizing role by preventing the economy from moving towards an explosive path. On the other hand, however, real-financial interactions and sentiment dynamics do amplify exogenous shocks and tend to generate persistent fluctuations and the associated welfare losses. We consider alternative policies to mitigate these effects.

Keywords: Real-financial interactions; Heterogeneous expectations; Aggregate sentiment dynamics; Macro-financial instability (search for similar items in EconPapers)
JEL-codes: E12 E24 E32 E44 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (24)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0165188917302063
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Macroeconomic and stock market interactions with endogenous aggregate sentiment dynamics (2017)
Working Paper: Macroeconomic and Stock Market Interactions with Endogenous Aggregate Sentiment Dynamics (2017)
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:eee:dyncon:v:91:y:2018:i:c:p:237-256

DOI: 10.1016/j.jedc.2017.10.002

Access Statistics for this article

Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok

More articles in Journal of Economic Dynamics and Control from Elsevier
Bibliographic data for series maintained by Catherine Liu ().