The economic costs of US stock mispricing

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Journal Article
Journal of Policy Modeling, 2011, 33 (4), pp. 552 - 567
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The USAGE model for the United States is used to quantify economic costs due to stock mispricing, made operational by shocking Tobin's q. The simulations quantify a potentially large impact even in the most favorable environment, where export demand holds up, and, the dollar is pro-cyclical. A two-year investment boom in two sectors increases consumption by a Net Present Value (NPV) amount of nearly one per cent, due to a positive investment externality onto the US terms of trade. If the investment is wasted, however, the consumption loss is nearly one-half of a per cent. A 5-year 'capital strike' across the whole economy subsequent to the boom - mimicking financial distress from a burst bubble - shaves around 10 per cent off consumption. Given these significant costs associated with " boom" and " bust" equity markets, we consider some, policy options that might result in greater stability in these markets. © 2010 Society for Policy Modeling.
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