@article{8cb942aef8a94b0b9123f78d49b56a4b,
title = "Financial Markets, the Real Economy, and Self-Fulfilling Uncertainties",
abstract = "We develop a model of informational interdependence between financial markets and the real economy, linking economic uncertainty to information production and aggregate economic activities in general equilibrium. The mutual learning between financial markets and the real economy creates a strategic complementarity in their information production, leading to self-fulfilling surges in economic uncertainties. In a dynamic setting, our model characterizes self-fulfilling uncertainty traps with two steady-state equilibria and a two-stage economic crisis in transitional dynamics.",
author = "Jess Benhabib and Xuewen Liu and Pengfei Wang",
note = "Funding Information: ∗Jess Benhabib is in the Department of Economics, New York University. Xuewen Liu is in the Department of Finance, Hong Kong University of Science and Technology. Pengfei Wang is in the Department of Economics, Hong Kong University of Science and Technology. We are grateful to the Editor and two referees for their detailed comments and suggestions that have significantly improved the paper. We thank Russell Cooper; Feng Dong; Gaetano Gaballo; Shiyang Huang; Alexander Kohlhas; Wei Xiong; Liyan Yang; Kathy Yuan; Zhen Zhou; and seminar participants at the FIRS conference 2018, Wharton Conference on Liquidity and Financial Fragility 2017, Barcelona GSE Summer Forum 2017: Information frictions, HKUST Macro Workshop 2017, Ts-inghua Finance Workshop 2017, AFR Summer Institute of Economics and Finance 2017, Ningbo International Finance Conference 2016, CUHK–Shenzhen, Tsinghua PBC, CKGSB, Shanghai Jiao Tong University (SAIF), and HKUST for helpful comments. Liu and Wang acknowledge financial support from the Hong Kong Research Grants Council (GRF #16504815). The authors have read the Journal of Finance{\textquoteright}s disclosure policy and have no conflicts of interest to disclose. Publisher Copyright: {\textcopyright} 2019 the American Finance Association",
year = "2019",
month = jun,
doi = "10.1111/jofi.12764",
language = "English (US)",
volume = "74",
pages = "1503--1557",
journal = "Journal of Finance",
issn = "0022-1082",
publisher = "Wiley-Blackwell",
number = "3",
}