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Pseudo-wealth and Consumption Fluctuations

Author

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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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    References listed on IDEAS

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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. Joseph E. Stiglitz, 2016. "The Theory of Credit and Macro-economic Stability," NBER Working Papers 22837, National Bureau of Economic Research, Inc.
    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, 2015. "The Choice Channel of Financial Innovation," NBER Working Papers 21686, National Bureau of Economic Research, Inc.
    5. Das, Sreyoshi & Kuhnen, Camelia & Nagel, Stefan, 2017. "Socioeconomic Status and Macroeconomic Expectations," CEPR Discussion Papers 12464, C.E.P.R. Discussion Papers.
    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. Joseph E. Stiglitz, 2014. "Reconstructing Macroeconomic Theory to Manage Economic Policy," NBER Working Papers 20517, National Bureau of Economic Research, Inc.
    8. Joseph E. Stiglitz, 2017. "The Revolution of Information Economics: The Past and the Future," NBER Working Papers 23780, National Bureau of Economic Research, Inc.

    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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