Economic fluctuations and pseudo-wealth

Emerging market business cycles: the cycle is the trend

Joseph Stiglitz and Martin M Guzman

Industrial and Corporate Change, 2021, vol. 30, issue 2, 297-315

Abstract: What can explain the large changes in aggregate demand that occur in the absence of any seemingly corresponding shock to the underlying state variables of the economy? We show that macroeconomic volatility can arise from dispersions of beliefs among agents. Such dispersion gives rise to bets and other trades in speculative assets. Such trades give rise to pseudo-wealth, wealth that individuals believe they have on the basis of expectations of returns on these gambles. In the aggregate, when there are enough opportunities for trade and large enough dispersions in beliefs, this perceived wealth may be dangerously untethered to either market wealth or the real wealth of the economy. Given the increased dispersion in beliefs that naturally arises from unprecedented shocks, the theory of pseudo-wealth provides new understandings of both the origins of unanticipated fluctuations and their magnitude, markedly different from prevailing theories grounded in common knowledge and beliefs among individuals. This paper explores the empirical and theoretical underpinnings of pseudo-wealth, links the concept to observed macroeconomic fluctuations, and lays out a research agenda that might help us better understand the role of pseudo-wealth and the circumstances in which it is pronounced.

Keywords: EFG; IFM; FR (search for similar items in EconPapers)
JEL-codes: B22 E03 E21 E44 E60 G01 G12 G18 (search for similar items in EconPapers)
Date: 2021
References: Add references at CitEc
Citations: View citations in EconPapers (1)

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Working Paper: Economic Fluctuations and Pseudo-Wealth (2021)
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