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Interactions between the real economy and the stock market

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  • Westerhoff, Frank

Abstract

We develop a simple behavioral macro model to study interactions between the real economy and the stock market. The real economy is represented by a Keynesian goods market approach while the setup for the stock market includes heterogeneous speculators. Using a mixture of analytical and numerical tools we find, for instance, that speculators may create endogenous boom-bust dynamics in the stock market which, by spilling over into the real economy, can cause lasting fluctuations in economic activity. However, fluctuations in economic activity may, by shaping the firms' fundamental values, also have an impact on the dynamics of the stock market.

Suggested Citation

  • Westerhoff, Frank, 2011. "Interactions between the real economy and the stock market," BERG Working Paper Series 84, Bamberg University, Bamberg Economic Research Group.
  • Handle: RePEc:zbw:bamber:84
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    References listed on IDEAS

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    Cited by:

    1. Fischer, Thomas & Riedler, Jesper, 2014. "Prices, debt and market structure in an agent-based model of the financial market," Journal of Economic Dynamics and Control, Elsevier, vol. 48(C), pages 95-120.

    More about this item

    Keywords

    goods market; stock market; heterogeneous speculators; stability analysis; complex dynamics;

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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