Imperfect Knowledge, Asset Price Swings and Structural Slumps: A Cointegrated VAR Analysis of Their Interdependence

Abstract

This paper is an empirically based discussion of interactions between speculative behavior in the currency markets and aggregate fluctuations in the real economy. It builds on the recent theory of Imperfect Knowledge Economics in Frydman and Goldberg (2007) and combines this with the Structural Slumps theory in Phelps (1994). The paper argues that this is likely to imcrease our understanding of the long recurrent spells of high unemployment that continue to mar our economies.

Keywords: Financial markets, Speculation, Long Swings, Imperfect Knowledge, CVAR

JEL Classification: E24, F31, F41