Abstract

Time change!

We show that the behavioural drivers of the equilibrium asset prices pose as a significant uncertainty channel to policymakers. Whilst policymakers maintain an information superiority based on the supply side operations, their decisions often lead to suboptimal welfare implications particularly due to the behavioural information constraints. This study presents a formal macro-finance framework where asset prices are determined due to both physical and behavioural drivers where the society’s behavioural responses to policies remain uncertain. We show that failure to incorporate an accurate account over the behavioural drivers lead to heighted risk premia, significant financial market drawbacks and negative real economic implications.