Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/162153
Authors: 
Flaschel, Peter
Charpe, Matthieu
Galanis, Giorgos
Proaño Acosta, Christian
Veneziani, Roberto
Year of Publication: 
2017
Series/Report no.: 
BERG Working Paper Series 125
Abstract: 
This paper studies the implications of heterogeneous capital gain expectations on output and asset 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.
Subjects: 
real-financial interactions
heterogeneous expectations,
aggregate sentiment dynamics
macro-financial instability
JEL: 
E12
E24
E32
E44
ISBN: 
978-3-943153-45-3
Document Type: 
Working Paper

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