NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Sentiments, Financial Markets, and Macroeconomic Fluctuations

Jess Benhabib, Xuewen Liu, Pengfei Wang

NBER Working Paper No. 21294
Issued in June 2015
NBER Program(s):Economic Fluctuations and Growth, International Finance and Macroeconomics

This paper studies how financial information frictions can generate sentiment-driven fluctuations in asset prices and self-fulfilling business cycles. In our model economy, exuberant financial market sentiments of high output and high demand for capital increase the price of capital, which signals strong fundamentals of the economy to the real side and consequently leads to an actual boom in real output and employment. The model further derives implications for asymmetric non-linear asset prices and for economic contagion and co-movement across countries. In the extension to the dynamic OLG setting, our model demonstrates that sentiment shocks can generate persistent output, employment and business cycle fluctuations, and offers some new implications for asset prices over business cycles.

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Document Object Identifier (DOI): 10.3386/w21294

Published: Benhabib, Jess & Liu, Xuewen & Wang, Pengfei, 2016. "Sentiments, financial markets, and macroeconomic fluctuations," Journal of Financial Economics, Elsevier, vol. 120(2), pages 420-443. citation courtesy of

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