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The economic costs of US stock mispricing

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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 '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.

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  • Bird, R. & Menzies, G. & Dixon, P. & Rimmer, M., 2011. "The economic costs of US stock mispricing," Journal of Policy Modeling, Elsevier, vol. 33(4), pages 552-567, July.
  • Handle: RePEc:eee:jpolmo:v:33:y:2011:i:4:p:552-567
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    Cited by:

    1. Majumder, Debasish, 2013. "Towards an efficient stock market: Empirical evidence from the Indian market," Journal of Policy Modeling, Elsevier, vol. 35(4), pages 572-587.
    2. Gordon Menzies & Peter Dixon & Maureen Rimmer, 2016. "In Praise of (Some) Red Tape: A New Approach to Regulation," The Economic Record, The Economic Society of Australia, vol. 92(299), pages 631-647, December.
    3. Majumder, Debasish, 2012. "When the market becomes inefficient: Comparing BRIC markets with markets in the USA," International Review of Financial Analysis, Elsevier, vol. 24(C), pages 84-92.
    4. J.A. Giesecke & W.J. Burns & A. Barrett & E. Bayrak & A. Rose & M. Suher, 2010. "Assessment of the Regional Economic Impacts of Catastrophic Events: CGE analysis of resource loss and behavioral effects of a RDD attack scenario," Centre of Policy Studies/IMPACT Centre Working Papers g-194, Victoria University, Centre of Policy Studies/IMPACT Centre.
    5. Gordon Menzies & Ron Bird & Peter B. Dixon & Maureen T. Rimmer, 2011. "Asset Price Regulators, Unite: You have the Macroeconomy to Win and the Microeconomic Losses are Small," The Economic Record, The Economic Society of Australia, vol. 87(278), pages 449-464, September.

    More about this item

    Keywords

    Financial crises Exchange rates Macroeconomic modeling Stock market;

    JEL classification:

    • C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General
    • G01 - Financial Economics - - General - - - Financial Crises
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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