Financial Market Shocks and the Macroeconomy

Feedback from stock prices to cash flows occurs because information revealed by firms' stock prices influences the actions of competitors. We explore the implications of feedback within a noisy rational expectations setting with publicly listed and private firms. In our setting, stock prices are affected by fundamental information, observed by some investors, by unobserved shocks to participation by informationless traders, and by real investment. The equilibrium relations between total output, dividends, and market prices in our setting are consistent with regularities documented in the macro finance literature, and we also generate new, potentially testable, implications