Sentiments, financial markets, and macroeconomic fluctuations
Jess Benhabib (),
Xuewen Liu and
Pengfei Wang ()
Journal of Financial Economics, 2016, vol. 120, issue 2, 420-443
This paper studies how financial information frictions can generate sentiment-driven fluctuations in asset prices and self-fulfilling business cycles. In our model economy, exuberant financial market sentiments of high output and high demand for capital increase the price of capital, which signals strong fundamentals of the economy to the real side and consequently leads to an actual boom in real output and employment. The model further derives implications for asymmetric nonlinear asset prices and for economic contagion and co-movement across countries. In the extension to the dynamic overlapping generations (OLG) setting, our model demonstrates that sentiment shocks can generate persistent output, employment, and business cycle fluctuations, and it offers some new implications for asset prices over business cycles.
Keywords: Financial sector; Sentiment-driven fluctuations; Self-fulfilling business cycles; Beauty contests; Animal spirits (search for similar items in EconPapers)
JEL-codes: E2 E44 G01 G20 (search for similar items in EconPapers)
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (23) Track citations by RSS feed
Downloads: (external link)
Full text for ScienceDirect subscribers only
Working Paper: Sentiments, Financial Markets, and Macroeconomic Fluctuations (2015)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:120:y:2016:i:2:p:420-443
Access Statistics for this article
Journal of Financial Economics is currently edited by G. William Schwert
More articles in Journal of Financial Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().