Financial Markets, the Real Economy, and Self-Fulfilling Uncertainties

Jess Benhabib, Xuewen Liu, Pengfei Wang

    Research output: Contribution to journalArticle

    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.

    Original languageEnglish (US)
    Pages (from-to)1503-1557
    Number of pages55
    JournalJournal of Finance
    Volume74
    Issue number3
    DOIs
    StatePublished - Jun 2019

    ASJC Scopus subject areas

    • Accounting
    • Finance
    • Economics and Econometrics

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