The economic costs of US stock mispricing

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Bird, Ronald, Menzies, Gordon, Dixon, Peter and Rimmer, Maureen T (2010) The economic costs of US stock mispricing. Journal of Policy Modeling, 33 (4). pp. 552-567. ISSN 0161-8938


The USAGE model for the United States is used to quantify economic costs due to stock mispricing, made operational by shocking Tobin's q. The simulations quantify a potentially large impact even in the most favorable environment, where export demand holds up, and, the dollar is pro-cyclical. A two-year investment boom in two sectors increases consumption by a Net Present Value (NPV) amount of nearly one per cent, due to a positive investment externality onto the US terms of trade. If the investment is wasted, however, the consumption loss is nearly one-half of a per cent. A 5-year ‘capital strike’ across the whole economy subsequent to the boom – mimicking financial distress from a burst bubble – shaves around 10 per cent off consumption. Given these significant costs associated with “boom” and “bust” equity markets, we consider some, policy options that might result in greater stability in these markets.

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Item type Article
DOI 10.1016/j.jpolmod.2010.10.010
Official URL
Subjects Historical > FOR Classification > 1402 Applied Economics
Historical > FOR Classification > 1605 Policy and Administration
Historical > Faculty/School/Research Centre/Department > College of Business
Current > Division/Research > Centre of Policy Studies (CoPS)
Keywords financial crises, exchange rates, macroeconomic modeling, stock market
Citations in Scopus 7 - View on Scopus
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