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Economic fluctuations and pseudo-wealth
[Emerging market business cycles: the cycle is the trend]

Author

Listed:
  • Joseph E Stiglitz
  • Martin M Guzman

Abstract

What can explain the large changes in aggregate demand that occur in the absence of any seemingly corresponding shock to the underlying state variables of the economy? We show that macroeconomic volatility can arise from dispersions of beliefs among agents. Such dispersion gives rise to bets and other trades in speculative assets. Such trades give rise to pseudo-wealth, wealth that individuals believe they have on the basis of expectations of returns on these gambles. In the aggregate, when there are enough opportunities for trade and large enough dispersions in beliefs, this perceived wealth may be dangerously untethered to either market wealth or the real wealth of the economy. Given the increased dispersion in beliefs that naturally arises from unprecedented shocks, the theory of pseudo-wealth provides new understandings of both the origins of unanticipated fluctuations and their magnitude, markedly different from prevailing theories grounded in common knowledge and beliefs among individuals. This paper explores the empirical and theoretical underpinnings of pseudo-wealth, links the concept to observed macroeconomic fluctuations, and lays out a research agenda that might help us better understand the role of pseudo-wealth and the circumstances in which it is pronounced.

Suggested Citation

  • Joseph E Stiglitz & Martin M Guzman, 2021. "Economic fluctuations and pseudo-wealth [Emerging market business cycles: the cycle is the trend]," Industrial and Corporate Change, Oxford University Press and the Associazione ICC, vol. 30(2), pages 297-315.
    • Handle: RePEc:oup:indcch:v:30:y:2021:i:2:p:297-315.
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    File URL: http://hdl.handle.net/10.1093/icc/dtab010
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    Cited by:

    1. Tomohiro HIRANO & Joseph E. Stiglitz, 2021. "Land Speculation and Wobbly Dynamics with Endogenous Phase Transitions," CIGS Working Paper Series 21-009E, The Canon Institute for Global Studies.
    2. Stiglitz, Joseph, 2021. "Lessons from COVID-19 and Trump for Theory and Policy (Paper)," Journal of Policy Modeling, Elsevier, vol. 43(4), pages 749-760.
    3. Mattauch, Linus & Klenert, David & Stiglitz, Joseph E. & Edenhofer, Ottmar, 2022. "Overcoming wealth inequality by capital taxes that finance public investment," Structural Change and Economic Dynamics, Elsevier, vol. 63(C), pages 383-395.
    4. Raffaele Mattera & Michelangelo Misuraca & Maria Spano & Germana Scepi, 2023. "Mixed frequency composite indicators for measuring public sentiment in the EU," Quality & Quantity: International Journal of Methodology, Springer, vol. 57(3), pages 2357-2382, June.

    More about this item

    Keywords

    EFG; IFM; FR;
    All these keywords.

    JEL classification:

    • B22 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Macroeconomics
    • E03 - Macroeconomics and Monetary Economics - - General - - - Behavioral Macroeconomics
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • G01 - Financial Economics - - General - - - Financial Crises
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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