Research Program

The general theme of my research is the interaction between the real and the financial spheres of the economy. Conventional theories imply that the causality runs from the goods markets to the financial markets, that is, the equilibrium conditions in the goods markets (“fundamentals”) determine asset prices. My research is based on the opposite hypothesis, that is, the idiosyncratic behavior in financial markets impacts through various channels upon activities in the “real” world.

A central topic of my research is the dynamics of asset prices. They fluctuate in a sequence of upward and downward trends (bull markets and bear markets). This pattern is realised across different time scales, lasting from minutes to years. Hence, overshooting in financial markets is the rule, not the exception. One of the key factors driving this dynamics is the widespread use of technical trading systems (applied at different time scales). Their performance and its impact on exchange rates, stock prices and commodities prices is one theme of my work.

A second theme of my research is the impact of financial market instability on real activity in the economy. Here I have studied a number of channels of transmission, including the following:

• The double role of the US dollar as national currency and as world currency, in particular the impact of the fluctuations of the exchange rate and the interest rate of the dollar on world trade inflation, on real interest rates on dollar debts and on financial crises.
• The deviations of the exchange rate from purchasing power parity for internationally traded goods and services (tradables) and its impact on export market shares.
• The impact of the differential between the rate of interest and the rate of growth on investment demand, economic growth and public debt.
• The influence of stock price fluctuations on business investment and on consumer demand.
• The connection between asset price dynamics and the long-term shift away from activity in goods markets to activity in financial markets, and its consequences for economic growth, employment and the European social model. This concerns, in particular, the different regulation of financial markets and goods markets in the first and second half of the post-war period and the related increase in the incentives to accumulate in the financial sphere relative to the real sphere of the economy.