DP8569 Learning From Stock Prices and Economic Growth

Author(s): Joël Peress
Publication Date: September 2011
Keyword(s): asymmetric information, capital allocation, financial development, growth, learning, noisy rational expectations equilibrium, stock market
JEL(s): G11, G14, O16
Programme Areas: International Macroeconomics, Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=8569

A competitive stock market is embedded into a neoclassical growth economy to analyze the interplay between the acquisition of information about firms, its partial revelation through stock prices, capital allocation and income. The stock market allows investors to share their costly private signals in a cost-effective incentive-compatible way. It contributes to economic growth by raising total factor productivity, but its impact is only transitory. Several predictions on the evolution of real and financial variables are derived, including capital efficiency, total factor productivity, industrial specialization, wealth inequality, stock trading intensity, liquidity and return volatility.