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EXPECTATION-DRIVEN ASSET PRICE FLUCTUATIONS UNDER THE SPIRIT OF CAPITALISM HYPOTHESIS: THE ROLE OF HETEROGENEITY

Published online by Cambridge University Press:  03 October 2019

Lise Clain-Chamosset-Yvrard
Lise Clain-Chamosset-Yvrard*
Affiliation:
Univ. Lyon, Université Lumière Lyon 2
*
Address correspondence to: Lise Clain-Chamosset-Yvrard, Univ Lyon, Université Lumière Lyon 2, GATE UMR 5824, F-69130 Ecully, France. e-mail: [email protected].
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Abstract

In this paper, I study how heterogeneity amongst agents affects the occurrence of expectation-driven asset price fluctuations in a pure exchange economy à la Lucas, with infinitely lived households, under the hypothesis of spirit of capitalism (SOC). I consider heterogeneous households in terms of preferences, endowments, and initial wealth, and capture the SOC through preferences for wealth. Preferences for wealth are the key element of this paper in a twofold aspect. First, they explain the occurrence of asset price fluctuations driven by self-fulfilling changes in expectations. Second, heterogeneity in endowments affects asset price level and dynamics only if preferences are heterogeneous. For instance, if agents with the strongest SOC are also the rich in terms of endowments, heterogeneity in endowments heightens the asset price level in the long run and destabilizes by enlarging the range of parameter values for which expectation-driven asset price fluctuations occur.

Keywords

Asset Pricing ModelSpirit of CapitalismHeterogeneityExpectation-Driven Fluctuations
Type
Articles
Information
Macroeconomic Dynamics , Volume 25 , Issue 2 , March 2021 , pp. 509 - 535
Copyright
© Cambridge University Press 2019

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Footnotes

I am grateful for useful suggestions from an anonymous referee, Nicolas Abad, Aurélien Eyquem, Takashi Kamihigashi, Cuong Le Van, Carine Nourry, Thomas Seegmuller, Alain Venditti, Bertrand Wigniolle, and from participants at Dyniper Conference at Marseille. Any remaining errors are mine.

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