Imperfect Knowledge, Asset Price Swings, and Structural Slumps

Katarina Juselius

Imperfect Knowledge, Asset Price Swings, and Structural Slumps

Department of Economics

6 Citations (Scopus)

Abstract

This paper discusses interactions between speculative behavior in the currency markets and aggregate fluctuations in the real economy. It builds on the Structural Slumps theory in Phelps (1994) and the recent theory of Imperfect Knowledge Economics in Frydman and Goldberg (2007). The former emphasizes real interest rates and real exchange rates as potentially important determinants underlying the persistent fluctuations in aggregate activities, and the latter provides the conditions under which speculative behavior in currency markets generates such persistence. The paper argues that by combing the two theories we can shed new light on the two-way interdependence between persistent swings in asset markets and persistent fluctuations in the real economy. In particular, we may improve our understanding of the mechanisms behind the long recurrent spells of high unemployment that continue to mar our economies.

Original language	English
Title of host publication	Rethinking Expectations : The Way Forward for Macroeconomics
Editors	Roman Frydman, Edmund Phelps
Place of Publication	Princeton, New Jersey
Publisher	Princeton University Press
Publication date	23 Jan 2013
Pages	328-350
Chapter	10
ISBN (Print)	9780691155234
Publication status	Published - 23 Jan 2013

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AB - This paper discusses interactions between speculative behavior in the currency markets and aggregate fluctuations in the real economy. It builds on the Structural Slumps theory in Phelps (1994) and the recent theory of Imperfect Knowledge Economics in Frydman and Goldberg (2007). The former emphasizes real interest rates and real exchange rates as potentially important determinants underlying the persistent fluctuations in aggregate activities, and the latter provides the conditions under which speculative behavior in currency markets generates such persistence. The paper argues that by combing the two theories we can shed new light on the two-way interdependence between persistent swings in asset markets and persistent fluctuations in the real economy. In particular, we may improve our understanding of the mechanisms behind the long recurrent spells of high unemployment that continue to mar our economies.

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Imperfect Knowledge, Asset Price Swings, and Structural Slumps

Abstract

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