|
EconStor >
Institut für Weltwirtschaft (IfW), Kiel >
Economics: The Open-Access, Open-Assessment E-Journal - Journal Articles >
Please use this identifier to cite or link to this item:
http://hdl.handle.net/10419/67048
|
| | |
| Title: | | Predicting the unpredictable: Forecastable bubbles and business cycles under rational expectations  |
| Authors: | | Gracia, Eduard |
| Issue Date: | | 2012 |
| Citation: | | [Journal:] Economics: The Open-Access, Open-Assessment E-Journal [Volume:] 6 [Issue:] 2012-41 [Pages:] 1-43 |
| Series/Report no.: | | Economics 2012-41 |
| Abstract: | | A popular interpretation of the Rational Expectations/Efficient Markets hypothesis states that, if it holds, market valuations must follow a random walk; hence, the hypothesis is frequently criticized on the basis of empirical evidence against such a prediction. Yet this reasoning incurs what we could call the 'fallacy of probability diffusion symmetry': although market efficiency does indeed imply that the mean (i.e. 'expected') path must rule out any cyclical or otherwise arbitrage-enabling pattern, if the probability diffusion process is asymmetric the observed path will most closely resemble not the mean but the median, which is not subject to this condition. In this context, this paper develops an efficient markets model where the median path of Tobin's q ratio displays regular, periodic cycles of bubbles and crashes reflecting an agency problem between investors and producers. The model is tested against U.S. market data, and its results suggest that such a regular cycle does indeed exist and is statistically significant. The aggregate production model in Gracia (Uncertainty and Capacity Constraints: Reconsidering the Aggregate Production Function, 2011) is then put forward to show how financial fluctuations can drive the business cycle by periodically impacting aggregate productivity and, as a consequence, GDP growth. |
| Subjects: | | rational expectations efficient markets financial bubbles stock markets booms and crashes Tobin's q business cycles economic rents |
| JEL: | | E22 E23 E32 G12 G14 |
| Persistent Identifier of the first edition: | | doi:10.5018/economics-ejournal.ja.2012-41 |
| Creative Commons License: | |  |
| Document Type: | | Article |
| Appears in Collections: | | Economics: The Open-Access, Open-Assessment E-Journal - Journal Articles
|
| |
| | |
Download bibliographical data as:
BibTeX
|
| |
Share on:http://hdl.handle.net/10419/67048
|
Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.
|