Hostname: page-component-848d4c4894-nr4z6 Total loading time: 0 Render date: 2024-05-21T00:04:08.225Z Has data issue: false hasContentIssue false
  • English
  • Français

EXPECTATION-DRIVEN ASSET PRICE FLUCTUATIONS UNDER THE SPIRIT OF CAPITALISM HYPOTHESIS: THE ROLE OF HETEROGENEITY

Published online by Cambridge University Press:  03 October 2019

Lise Clain-Chamosset-Yvrard
Lise Clain-Chamosset-Yvrard*
Affiliation:
Univ. Lyon, Université Lumière Lyon 2
*
Address correspondence to: Lise Clain-Chamosset-Yvrard, Univ Lyon, Université Lumière Lyon 2, GATE UMR 5824, F-69130 Ecully, France. e-mail: clain-chamosset@gate.cnrs.fr.
Get access Rights & Permissions [Opens in a new window]

Abstract

In this paper, I study how heterogeneity amongst agents affects the occurrence of expectation-driven asset price fluctuations in a pure exchange economy à la Lucas, with infinitely lived households, under the hypothesis of spirit of capitalism (SOC). I consider heterogeneous households in terms of preferences, endowments, and initial wealth, and capture the SOC through preferences for wealth. Preferences for wealth are the key element of this paper in a twofold aspect. First, they explain the occurrence of asset price fluctuations driven by self-fulfilling changes in expectations. Second, heterogeneity in endowments affects asset price level and dynamics only if preferences are heterogeneous. For instance, if agents with the strongest SOC are also the rich in terms of endowments, heterogeneity in endowments heightens the asset price level in the long run and destabilizes by enlarging the range of parameter values for which expectation-driven asset price fluctuations occur.

Keywords

Asset Pricing ModelSpirit of CapitalismHeterogeneityExpectation-Driven Fluctuations
Type
Articles
Information
Macroeconomic Dynamics , Volume 25 , Issue 2 , March 2021 , pp. 509 - 535
Copyright
© Cambridge University Press 2019

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

I am grateful for useful suggestions from an anonymous referee, Nicolas Abad, Aurélien Eyquem, Takashi Kamihigashi, Cuong Le Van, Carine Nourry, Thomas Seegmuller, Alain Venditti, Bertrand Wigniolle, and from participants at Dyniper Conference at Marseille. Any remaining errors are mine.

References

REFERENCES

Airaudo, M. (2017) Complex stock price dynamics and recurrent bubbles under the spirit of capitalism. Economic Theory 47, 47–73.CrossRefGoogle Scholar
Aiyagari, S. R. (1994) Uninsured Idiosyncratic Risks and Aggregate Saving. Quarterly Journal of Economics 109, 659–684.CrossRefGoogle Scholar
Atkinson, A. B., Piketty, T. and Saez, E. (2011) Top incomes in the long run of history. Journal of Economic Literature 49, 3–71.CrossRefGoogle Scholar
Bakshi, G. S. and Chen, Z. (1996) The spirit of capitalism and stock market prices. The American Economic Review 86, 133–157.Google Scholar
Becker, R. A. (1980) On the long-run steady state in a simple dynamic model of equilibrium with heterogeneous households. Quarterly Journal of Economics 95, 375–382.CrossRefGoogle Scholar
Becker, R. A. (2006) Equilibrium dynamics with many agents. In: Rose-Anne Dana, T. M., Le Van, Cuong and Nishimura, K. (eds.), Handbook on Optimal Growth 1. Discrete Time, pp. 385–442. Berlin, Heidelberg: Springer.CrossRefGoogle Scholar
Bewley, T. (1977) The permanent income hypothesis: A theoretical formulation. Journal of Economic Theory 16, 252–292.CrossRefGoogle Scholar
Blanchard, O. and Kahn, C. M (1980) The Solution of Linear Difference Models under Rational Expectations. Econometrica, 48, 1305–1311CrossRefGoogle Scholar
Breeden, D. T. (1979) An intertemporal asset pricing model with stochastic consumption and investment opportunities. Journal of Financial Economics 7, 265–296.CrossRefGoogle Scholar
Boileau, M. and Braeu, R. (2007) The spirit of capitalism, asset returns, and the business cycles. Macroeconomic Dynamics 11, 214–230.CrossRefGoogle Scholar
Campbell, J. Y. and Cochrane, J. H. (1999) By force of habit: A consumption-based explanation of aggregate stock market behavior. Journal of Political Economy 107, 205–251.CrossRefGoogle Scholar
Carli, F. and Modesto, L. (2018) Endogenous credit and investment cycles with asset price volatility. Macroeconomic Dynamics 22, 1859–1874.CrossRefGoogle Scholar
Carroll, C. (2000) Why do the rich save so much? In: Slemrod, J. B. (ed.), Does Atlas Shrug? The Economic Consequences of Taxing the Rich, London: Harvard University Press.Google Scholar
Caselli, F. and Ventura, J. (2000) A representative consumer theory of distribution. American Economic Review 90, 909–926.CrossRefGoogle Scholar
Chatterjee, S. (1994) Transitional dynamics and the distribution of wealth in a neoclassical growth model. Journal of Public Economics 54, 97–119.CrossRefGoogle Scholar
Chatterjee, S. and Turnovsky, S.-J. (2012) Infrastructure and inequality. European Economic Review 56, 1730–1745.CrossRefGoogle Scholar
Dynan, K., Skinner, J. and Zeldes, S. (2004) Do the rich save more? Journal of Political Economy 112, 397–444.CrossRefGoogle Scholar
Flavin, M. and Nakagawa, S. (2008) A model of housing in the presence of adjustment costs: A structural interpretation of habit persistence. American Economic Review 98, 474–495.CrossRefGoogle Scholar
Gali, J. (1994) Keeping up with the Joneses: Consumption externalities, portfolio choice, and asset prices. Journal of Money, Credit and Banking 26, 1–8.CrossRefGoogle Scholar
Gasteiger, E. (2018) Do heterogeneous expectations constitute a challenge for policy interaction? Macroeconomic Dynamics 22, 2107–2140.CrossRefGoogle Scholar
Gong, L. and Zou, H.-F.. (2002) Direct preferences for wealth, the risk premium puzzle, growth, and policy effectiveness. Journal of Economic Dynamics and Control 26, 271–302.CrossRefGoogle Scholar
Huang, K. and Werner, J. (2004) Implementing Arrow-Debreu equilibria by trading infinitely-lived securities. Economic Theory 24, 603–622.CrossRefGoogle Scholar
Kamihigashi, T. (2008) The spirit of capitalism, stock market bubbles and output fluctuations. International Journal of Economic Theory 4, 3–28.CrossRefGoogle Scholar
Keynes, J. M. (1919) The Economic Consequences of the Peace. London: Macmillan & Co.Google Scholar
Kocherlakota, N. R. (1992) Bubbles and constraints on debt accumulation. Journal of Economic Theory 57, 245–256.CrossRefGoogle Scholar
Kumhof, M., Rancière, R. and Winant, P. (2015) Inequality, leverage and crises. American Economic Review 105, 1217–1245.CrossRefGoogle Scholar
Le Van, C., Pham, N. S. and Vailakis, Y. (2015) Financial Asset Bubble with Heterogeneous Agents and Endogenous Borrowing constraints. Working Paper.Google Scholar
Lucas, R.E. (1978) Asset prices in an exchange economy. Econometrica 46, 1429–1445.CrossRefGoogle Scholar
Marx, K. (1867) Capital, Volume 1.Google Scholar
Matsuyama, K. (1990) Sunspot equilibria (rational bubbles) in a model of money-in-the-utility function. Journal of Monetary Economics 25, 137–144.CrossRefGoogle Scholar
Obstfeld, M. (1984) Multiple stable equilibria in an optimizing perfect foresight model. Econometrica 52, 223–228.CrossRefGoogle Scholar
Piazzesi, M., Schneider, M. and Tuzel, S. (2007) Housing, consumption and asset pricing. Journal of Financial Economics 83, 531–569.CrossRefGoogle Scholar
Rajan, R. (2010) Fault Lines. Princeton: Princeton University Press.Google Scholar
Saez, E. and Stantcheva, S. (2016) A Simpler Theory of Optimal Capital Taxations. NBER, Working Paper No. 22664.CrossRefGoogle Scholar
Santos, M. S. and Woodford, M. (1997) Rational asset pricing bubbles. Econometrica 65, 19–57.CrossRefGoogle Scholar
Shiller, R. J. (1981) Do stock prices move too much to be justified by subsequent changes in dividends? American Economic Review 71, 421–436.Google Scholar
Shiller, R. J. (2015) Irrational Exuberance. Princeton: Princeton University Press.CrossRefGoogle Scholar
Smith, W. T. (2001) How does the spirit of capitalism affect stock market prices? Review of Financial Studies 14, 1215–1232.CrossRefGoogle Scholar
Sorger, G. (2000) Income and wealth distribution in a simple model of growth. Economic Theory 16, 23–42.CrossRefGoogle Scholar
Stiglitz, J. E. (1970) A consumption-oriented theory of the demand for financial assets and the term structure of interest rates. Review of Economic Studies 37, 321–351CrossRefGoogle Scholar
Suen, R. M. H. (2014) Time preference and the distributions of wealth and income. Economic Inquiry 52, 364–381.CrossRefGoogle Scholar
Survey of Consumer Finances (2013) Board of Governors of the Federal Reserve System.Google Scholar
Walsh, C. E. (2010) Monetary Theory and Policy, 3rd ed. MIT Press Books, The MIT Press.Google Scholar
Weber, M. (1905) The Protestant Ethic and the Spirit of Capitalism. New York: Charles Scribners Sons.Google Scholar
Yogo, M. (2006) A consumption-based explanation of expected stock returns. Journal of Finance 61, 539–580.CrossRefGoogle Scholar
Zou, H.-F. (1994) The spirit of capitalism and long-run growth. European Journal of Political Economy 10, 279–293.CrossRefGoogle Scholar
Zou, H.-F. (1995) The spirit of capitalism and savings behavior. Journal of Economic Behavior and Organization 28, 131–145.Google Scholar
Zhou, G. (2015) The spirit of capitalism and rational bubbles. Macroeconomic Dynamics 20, 1432–1457.CrossRefGoogle Scholar