EconPapers    
Economics at your fingertips  
 

Sentiments, financial markets, and macroeconomic fluctuations

Jess Benhabib (), Xuewen Liu and Pengfei Wang ()

Journal of Financial Economics, 2016, vol. 120, issue 2, 420-443

Abstract: 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)
Date: 2016
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)
http://www.sciencedirect.com/science/article/pii/S0304405X16000106
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Sentiments, Financial Markets, and Macroeconomic Fluctuations (2015) Downloads
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:jfinec:v:120:y:2016:i:2:p:420-443

DOI: 10.1016/j.jfineco.2016.01.008

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 ().

 
Page updated 2021-07-17
Handle: RePEc:eee:jfinec:v:120:y:2016:i:2:p:420-443