Topics in Middle Eastern and North African Economies

Document Type

Article

Publication Date

5-1-2017

Abstract

Can financial uncertainty shocks induce real downturns? To investigate this question theoretically, this paper develops a dynamic stochastic general equilibrium model with two period lived heterogenous agents, monopolistically competitive firms and sticky prices. In the model financial uncertainty is measured by the volatility of stock prices and this volatility results from the stochastic irrational beliefs of nonsophisticated agents about the future performance of the stock. An increase in the stock price volatility decreases aggregate demand and generates a significant contraction in output. The model contributes to the literature by modeling financial market volatility in a general equilibrium framework, establishing its causal impact on real variables, highlighting the mechanisms through which the impact works, and providing estimates of its magnitude

Journal Title

Topics in Middle Eastern and North African Economies

ISSN

2334-282X

Publisher

Middle East Economic Association and Loyola University Chicago

Volume

19

Issue

1

Comments

Presentation of the articles in the Topics in Middle Eastern and North African Economies was made possible by a limited license granted to Loyola University Chicago and Middle East Economics Association from the authors who have retained all copyrights in the articles.

Creative Commons License

Creative Commons License
This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 3.0 License.

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