Topic: Financial Markets, the Real Economy, and Self-fulfilling Uncertainties
Speaker: Xuewen Liu, Assistant Professor of Finance, Business School, The Hong Kong University of Science and Technology
Date: March 15th (Wednesday)
Location: Building 4, Room 101
Uncertainty in both financial markets and the real economy rises sharply during recessions. We develop a model of informational interdependence between financial markets and the real economy, linking uncertainty to information production (acquisition) and aggregate economic activities to explain this intriguing empirical fact. We argue that there exists mutual learning between financial markets and the real economy. Their joint information productions determine both the real production efficiency in the real sector and the price efficiency in the financial sector. The mutual learning makes information production in the financial sector and that in the real sector a strategic complementarity. A self-fulfilling surge in financial uncertainty and real uncertainty can naturally arise when both sectors produce little information in anticipation of the other sector to do so. At the same time, aggregate output falls as the real production efficiency deteriorates. Our model has other implications on aggregate economic activities.
About the speaker: