Pseudo-wealth and Consumption Fluctuations
Author | : Martin Guzman |
Publisher | : |
Total Pages | : 36 |
Release | : 2016 |
ISBN-10 | : OCLC:963961146 |
ISBN-13 | : |
Rating | : 4/5 (46 Downloads) |
Book excerpt: Abstract: This paper provides an explanation for situations in which the state variables describing the economy do not change, but aggregate consumption experiences significant changes. We present a theory of pseudo-wealth--individuals' perceived wealth that is derived from heterogeneous beliefs and expectations of gains in a bet. This wealth is divorced from real assets that may exist in society. The creation of a market for bets will imply positive pseudo-wealth. Changes in the differences of prior beliefs will lead to changes in expected wealth and hence to changes in consumption, implying ex-post intertemporal individual and aggregate consumption misallocations and instabilities. Thus, in the environment we describe, completing markets increases macroeconomic volatility, raising unsettling welfare questions