Macroeconomic and stock market interactions with endogenous aggregate sentiment dynamics
No 186-2017, IMK Working Paper from IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute
This paper studies the implications of heterogeneous capital gain expectations on output andasset 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)
Pages: 37 pages
New Economics Papers: this item is included in nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12) Track citations by RSS feed
Downloads: (external link)
Journal Article: Macroeconomic and stock market interactions with endogenous aggregate sentiment dynamics (2018)
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)
Persistent link: https://EconPapers.repec.org/RePEc:imk:wpaper:186-2017
Access Statistics for this paper
More papers in IMK Working Paper from IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute Contact information at EDIRC.
Bibliographic data for series maintained by Sabine Nemitz ().