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Asset prices and rents in a GE model with imperfect competition

  • Pierre Lafourcade
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    This paper analyses the general equilibrium effects on asset valuation and capital accumulation of an exogenous drop in the rate of return required by investors in a model of production with imperfectly competitive product markets. The model improves substantially on the standard perfectly competitive neo-classical framework, by dissociating the behavior of marginal and average q. It tracks more closely current observed data on the ratio of stock-market value to the economy's capital base, while uncoupling this valuation ratio from investment behavior. The model does so by assuming that asset holders price not only the future marginal productivity of capital, but also the value of monopoly franchises, which arise from the interplay of market power and returns to scale.

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    Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2003-60.

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    Date of creation: 2003
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    Handle: RePEc:fip:fedgfe:2003-60
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    4. Julio J. Rotemberg & Michael Woodford, 1993. "Dynamic General Equilibrium Models with Imperfectly Competitive Product Markets," NBER Working Papers 4502, National Bureau of Economic Research, Inc.
    5. Jason G. Cummins & Kevin A. Hassett & Stephen D. Oliner, 1999. "Investment behavior, observable expectations, and internal funds," Finance and Economics Discussion Series 1999-27, Board of Governors of the Federal Reserve System (U.S.).
    6. Narayana R. Kocherlakota, 1996. "The Equity Premium: It's Still a Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(1), pages 42-71, March.
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    14. Roger E. A. Farmer, 1999. "Macroeconomics of Self-fulfilling Prophecies, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262062038, June.
    15. John H Cochrane, 2003. "Where is the Market Going: Uncertain Facts and Novel Theories," Levine's Working Paper Archive 618897000000000762, David K. Levine.
    16. Marianne Baxter & Robert G. King, 1991. "Productive externalities and business cycles," Discussion Paper / Institute for Empirical Macroeconomics 53, Federal Reserve Bank of Minneapolis.
    17. John Heaton & Deborah Lucas, 2000. "Stock prices and fundamentals," Proceedings, Federal Reserve Bank of San Francisco, issue Apr.
    18. Edward C. Prescott, 2002. "Prosperity and Depression: 2002 Richard T. Ely Lecture," Working Papers 618, Federal Reserve Bank of Minneapolis.
    19. Stephen R. Bond & Jason G. Cummins, 2000. "The Stock Market and Investment in the New Economy: Some Tangible Facts and Intangible Fictions," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 31(1), pages 61-124.
    20. Susanto Basu & John G. Fernald, 1995. "Are Apparent Productive Spillovers a Figment of Specification Error?," NBER Working Papers 5073, National Bureau of Economic Research, Inc.
    21. Michael T. Kiley, 2000. "Stock prices and fundamentals in a production economy," Finance and Economics Discussion Series 2000-05, Board of Governors of the Federal Reserve System (U.S.).
    22. Sumru Altug & Alpay Filiztekin, 2002. "Scale effects, time-varying markups, and the cyclical behaviour of primal and dual productivity," Applied Economics, Taylor & Francis Journals, vol. 34(13), pages 1687-1702.
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