The economic costs of US stock mispricing

Ronald Bird, Gordon Menzies, Peter Dixon, Maureen Rimmer

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    7 Citations (Scopus)

    Abstract

    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 a??capital strikea?? 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.
    Original languageEnglish
    Pages (from-to)552 - 567
    Number of pages16
    JournalJournal of Policy Modeling
    Volume33
    Issue number4
    DOIs
    Publication statusPublished - 2011

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