The paper studies the constrained efficiency of the aggregate stock market in which the investor obtains gain-loss utility directly from fluctuations in asset returns, in addition to consumption. I reveal that the competitive equilibrium is inefficient without any frictions as long as the agent...

Announcing a large fiscal stimulus may signal the government’s pessimism about the severity of a recession to the private sector, impairing the stabilizing effects of the policy. Using a theoretical model, we show that these signaling effects occur when the stimulus exceeds expectations and...

There is a large body of literature stressing the importance of developing financial markets, including stock markets, to enhance countries' growth. I argue that the relationship between stock markets and growth is exaggerated and that the simple act of opening a formal stock market is not a...

We introduce imperfect information in stock prices determination. Agents receive a noisy signal about the structural shock driving future dividend variations. Equilibrium stock prices include a transitory "noise bubble" which can be responsible for boom and bust episodes unrelated to economic...

This paper examines the effect of asset price volatility on fiscal policy stance. We find that asset price volatility affects the volatility of discretionary fiscal policy in a positive and significant manner, which according to Fatas and Mihov (2003) has negative repercussions on output...

This paper examines the links between asset price movements and fiscal adjustments. Our findings suggest that a pick up in asset prices increases the probability of initiating a fiscal adjustment, but it does not necessarily lead to a sustainable correction of fiscal imbalances. However, higher...

We study the nexus between endogenous growth and asset prices. We show that endogenous growth models with either horizontal and vertical innovation match financial data well due to countercyclical dividends which are either procyclical or acyclical in US data. Countercyclical dividends...

We study the nexus between endogenous growth and asset prices. Endogenous growth models with either horizontal or vertical innovation exhibit a good match to financial data due to countercyclical dividends which are either procyclical or acyclical in US data. In the model technology shocks...