Disagreement, Speculation, and Aggregate Investment

Baker, Steven D.; Hollifield, Burton; Osambela, Emilio

doi:10.2139/ssrn.2348434

Cited by 16 publications

(26 citation statements)

References 27 publications

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“…The reason is that with a preference for early resolution of uncertainty, investors react to changes in expectations of future growth by consuming more and investing less, increasing the interest rate and reducing the cost of capital, which leads to more investment by the firm and a higher growth rate. These results are in line with the findings of Heyerdahl-Larsen and Walden (2014) and Baker, Hollifield, and Osambela (2016) . 19 Focusing on the regulatory measures (bottom three panels), we can see that again, all three measures lead to welfare improvements because financial markets in general, and the stock market in particular, are less important for risk sharing.…”

Section: Robustness and Extensions Of Resultssupporting

confidence: 93%

“…Having a model with both production and disagreement is important for evaluating the real effects of disagreement and of the imposed regulatory measures, and in this respect our work is similar to Baker, Hollifield, and Osambela (2016). Their paper shows theoretically that static disagreement impacts a number of real variables such as aggregate investment, consumption, and output, which is consistent with our results; however, the disagreement process in our model is dynamic so that we do not have an a priori optimistic or pessimistic trader, and in addition we also study the effects of imposing various regulatory measures.…”

Section: Introductionmentioning

confidence: 99%

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The intended and unintended consequences of financial-market regulations: A general-equilibrium analysis

Buss

Dumas

Uppal

et al. 2016

Journal of Monetary Economics

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Financial markets have historically been regulated. This regulation is motivated by the desire to rule out anti-competitive behavior, to prevent agency problems that arise in the presence of asymmetric information, and to limit negative externalities, where the behavior of an individual investor or institution can affect the entire financial system. The recent financial crisis, which has highlighted the negative feedback from financial markets to the real sector, has intensified the debate about the ability of financial-market regulations to stabilize these markets and improve macroeconomic outcomes. We study the intended and unintended consequences of various regulatory measures used to reduce fluctuations in financial and real markets and to improve welfare. The measures we study are the ones that have been proposed by regulators in response to the financial crisis: the Tobin financial-transactions tax, portfolio (short-sale) constraints, and borrowing (leverage) constraints.For example, on 1 August 2012, France introduced a financial transaction tax of 0.20%; on 25 July 2012, Spain's Comision Nacional del Mercado de Valores (CNMV) imposed a three-month ban on short-selling stocks, while Italy's Consob prohibited short-selling of stocks of 29 banks and insurance companies; and, tighter leverage constraints have been proposed following the subprime crisis: for instance, on 17 October 2008 the European Commissioner, Joaquin Almunia, said: "Regulation is going to have to be thoroughly anti-cyclical, which is going to reduce leverage levels from what we've seen up to now."Our objective is to evaluate these three regulatory measures within the same dynamic, stochastic general equilibrium model of a production economy, and to compare within a single economic setting, both the intended and unintended effects of these different measures on the financial and real sectors. The kind of questions we address are the following: Of the three regulatory measures we consider, which is most effective in stabilizing financial markets? What exactly is the channel through which each measure works? What will be the impact, intended or unintended, of this measure on other financial variables and the spillover effects on real variables? Would more tightly regulated markets be more stable and increase productivity and welfare?We have undertaken a general-equilibrium analysis of a production economy with investors who are uncertain about the current state of the economy and disagree in a time-varying way about its expected growth rate. Trading in financial markets allows investors to share laborincome risks. But, financial markets also provide an arena for speculative trading amongst investors who disagree. This speculative trading increases volatility of bond and stock returns and also the volatility of investment growth, increases the equity risk premium, and reduces welfare.The main finding of our paper is that all three regulatory measures we consider have similar effects on financial and macroeconomic variables: they reduce stock ...

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Section: Robustness and Extensions Of Resultssupporting

confidence: 93%

Section: Introductionmentioning

confidence: 99%

The intended and unintended consequences of financial-market regulations: A general-equilibrium analysis

Buss

Dumas

Uppal

et al. 2016

Journal of Monetary Economics

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“…The main additional assumption in Equation 4is that the current Pareto weights X t are sufficient state variables to summarize the effect of heterogeneity upon individuals and the economy. This formulation is relatively flexible, permitting heterogeneous recursive preferences as in Dumas, Uppal and Wang (2000) or Anderson, Ghysels and Juergens (2005), and extending to heterogeneous beliefs as in Borovička (2016) and Baker, Hollifield and Osambela (2016).…”

Section: Willingness To Pay With Heterogeneous Agentsmentioning

confidence: 99%

“…We calibrate model parameters under both the subjective and objective measures, and report unconditional moments that approximate limiting behavior of our model as t → ∞. Although Borovička (2016) and Baker, Hollifield and Osambela (2016) also feature a nondegenerate stationary distribution, unconditional moments are not calibrated to data in their numerical examples.…”

Section: Numerical Examplesmentioning

confidence: 99%

“…24 The increase is slightly larger for Reduce Severity because perceived speculative gains increase investment relative to the case without disagreement, as in Eliminate Disasters. See Baker, Hollifield and Osambela (2016) The figure shows that the main state variable, the optimist's Pareto share x, has a non-degenerate stationary distribution. Results are generated by Monte Carlo simulation of 1,000,000 paths of 1,000 years each, with a starting value x 0 = 0.5.…”

Section: F Policy Effects On Growth Via Investmentmentioning

confidence: 99%

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Preventing Controversial Catastrophes

Baker¹,

Hollifield²,

Osambela³

2018

FEDS

Self Cite

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In a market-based democracy, we model different constituencies that disagree regarding the likelihood of economic disasters. Costly public policy initiatives to reduce or eliminate disasters are assessed relative to private alternatives presented by financial markets. Demand for such public policies falls as much as 40% with disagreement, and crowding out by private insurance drives most of the reduction. As support for disaster-reducing policy jumps in periods of disasters, costly policies may be adopted only after disasters occur. In some scenarios constituencies may even demand policies oriented to increase disaster risk if these policies introduce speculative opportunities.

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Economic impact of monetary policy: Focus on real estate sector in Italy

et al. 2020

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This study investigates the nexus between financial market and real estate (RE) sector against the backdrop of ECB's unconventional monetary policy. A financial dynamic computable general equilibrium (DCGE) model is calibrated on the financial social accounting matrix (FSAM) of Italian economy. The findings confirm that the inclusion of financial intermediation into real economy affects the real estate sector's output, value added, and pricing.

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Disagreement, Speculation, and Aggregate Investment

Cited by 16 publications

References 27 publications

The intended and unintended consequences of financial-market regulations: A general-equilibrium analysis

The intended and unintended consequences of financial-market regulations: A general-equilibrium analysis

Preventing Controversial Catastrophes

Economic impact of monetary policy: Focus on real estate sector in Italy

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