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...

We review how realistic frictions in information and/or rationality arrest general equilibrium (GE) feedbacks. In one specification, we maintain rational expectations but remove common knowledge of aggregate shocks. In another, we replace rational expectations with Level-k Thinking or a smooth...