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Financial Markets, the Real Economy, and Self‐Fulfilling Uncertainties
Author(s) -
BENHABIB JESS,
LIU XUEWEN,
WANG PENGFEI
Publication year - 2019
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/jofi.12764
Subject(s) - real economy , complementarity (molecular biology) , economics , financial market , general equilibrium theory , production (economics) , self fulfilling prophecy , microeconomics , finance , monetary economics , psychology , social psychology , genetics , biology
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.