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Pseudo-wealth and Consumption Fluctuations

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  • Martin Guzman
  • Joseph E. Stiglitz

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.

Suggested Citation

  • Martin Guzman & Joseph E. Stiglitz, 2016. "Pseudo-wealth and Consumption Fluctuations," NBER Working Papers 22838, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:22838
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    Citations

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    Cited by:

    1. Joseph E. Stiglitz, 2015. "New Theoretical Perspectives on the Distribution of Income and Wealth among Individuals: Part I. The Wealth Residual," NBER Working Papers 21189, National Bureau of Economic Research, Inc.
    2. Sreyoshi Das & Camelia M Kuhnen & Stefan Nagel, 2020. "Socioeconomic Status and Macroeconomic Expectations," Review of Financial Studies, Society for Financial Studies, vol. 33(1), pages 395-432.
    3. Joseph E. Stiglitz, 2015. "Towards a General Theory of Deep Downturns," NBER Working Papers 21444, National Bureau of Economic Research, Inc.
    4. Felipe S. Iachan & Plamen T. Nenov & Alp Simsek, 2021. "The Choice Channel of Financial Innovation," American Economic Journal: Macroeconomics, American Economic Association, vol. 13(2), pages 333-372, April.
    5. Botta, Alberto & Caverzasi, Eugenio & Russo, Alberto & Gallegati, Mauro & Stiglitz, Joseph E., 2021. "Inequality and finance in a rent economy," Journal of Economic Behavior & Organization, Elsevier, vol. 183(C), pages 998-1029.
    6. Joseph E Stiglitz, 2018. "Where modern macroeconomics went wrong," Oxford Review of Economic Policy, Oxford University Press, vol. 34(1-2), pages 70-106.
    7. Stiglitz, Joseph E., 2019. "Addressing climate change through price and non-price interventions," European Economic Review, Elsevier, vol. 119(C), pages 594-612.
    8. Martin Guzman & Joseph E Stiglitz, 2020. "Towards a dynamic disequilibrium theory with randomness," Oxford Review of Economic Policy, Oxford University Press, vol. 36(3), pages 621-674.
    9. Gao, George P. & Lu, Xiaomeng & Song, Zhaogang & Yan, Hongjun, 2019. "Disagreement beta," Journal of Monetary Economics, Elsevier, vol. 107(C), pages 96-113.
    10. Assenza, Tiziana & Cardaci, Alberto & Delli Gatti, Domenico, 2019. "Perceived wealth, cognitive sophistication and behavioral inattention," IMFS Working Paper Series 135, Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS).
    11. Joseph E. Stiglitz, 2016. "The Theory of Credit and Macro-economic Stability," NBER Working Papers 22837, National Bureau of Economic Research, Inc.
    12. Assenza, Tiziana & Cardaci, Alberto & Delli Gatti, Dominico, 2021. "The Leverage Self-Delusion: Perceived Wealth and Cognitive Sophistication," TSE Working Papers 19-1055, Toulouse School of Economics (TSE).
    13. Joseph E. Stiglitz, 2015. "Reconstructing Macroeconomic Theory to Manage Economic Policy," Palgrave Macmillan Books, in: Éloi Laurent & Jacques Cacheux (ed.), Fruitful Economics, chapter 1, pages 20-56, Palgrave Macmillan.
    14. Joseph E. Stiglitz, 2017. "The Revolution of Information Economics: The Past and the Future," NBER Working Papers 23780, National Bureau of Economic Research, Inc.

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    More about this item

    JEL classification:

    • D60 - Microeconomics - - Welfare Economics - - - General
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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