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"The arrival of new, unfamiliar, investment opportunities is often associated with "exuberant" movements in asset prices and real economic activity. During these episodes of high uncertainty, financial markets look at the real sector for signals about the profitability of the new investment opportunities, and vice versa. In this paper, we study how such information spillovers impact the incentives that agents face when making their real economic decisions. On the positive front, we find that the sensitivity of equilibrium outcomes to noise and to higher-order uncertainty is amplified, exacerbating the disconnect from fundamentals. On the normative front, we find that these effects are symptoms of constrained inefficiency; we then investigate policies that can improve welfare in our model without any informational advantage on the government's part. At the heart of these results is a distortion that induces a conventional neoclassical economy to behave as a Keynesian "beauty contest" and to exhibit fluctuations that may look like "irrational exuberance" to an outside observer"--National Bureau of Economic Research web site.
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Beauty contests and irrational exuberance: a neoclassical approach
2010, National Bureau of Economic Research
Electronic resource
in English
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Book Details
Published in
Cambridge, MA
Edition Notes
Title from PDF file as viewed on 4/13/2010.
Includes bibliographical references.
Also available in print.
System requirements: Adobe Acrobat Reader.
Mode of access: World Wide Web.
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Feedback?September 25, 2020 | Edited by MARC Bot | import existing book |
November 30, 2010 | Created by ImportBot | initial import |