CoPS/IMPACT Working Paper Number G-204

Title: The Economic Costs of US Stock Mispricing

Authors: G. Menzies, R. Bird, P. Dixon and M. Rimmer


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.

JEL classification: C50, G01, F41.

Please cite the later published version in:
Journal of Policy Modeling, Elsevier, vol. 33(4), pages 552-567, July 2010.

Keywords: Financial crises, exchange rates, macroeconomic modeling, stock market.

Working Paper Number G-204 can be downloaded in PDF format.

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