Financial Markets, the Real Economy, and Self-Fulfilling Uncertainties
54 Pages Posted: 7 Mar 2017 Last revised: 16 Jan 2019
Date Written: September 2018
We develop a general equilibrium model of informational interdependence between financial markets and the real economy, linking economic uncertainty to information production and aggregate economic activities. 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.
Keywords: Information production, Strategic complementarity, Real economy, Two-way learning, Economic uncertainty
JEL Classification: G01, G20, E2, E44
Suggested Citation: Suggested Citation