Malika, I actually adopted two children who are no longer with me. One is not with us by his choice as he was basically a good kids, but he got caught up in the drama of psychokid and was abused by him. He was seven years old when he came to us, exactly one year after psychokid came and suffered the same abuse from him as the other kids. I don't talk about him much because he was only with us a year and after his experience with Psycho was put in a foster home that fit him so well and that he loved so we were asked if we'd let them adopt him and we said "yes."
He was a nice kid, kind of quiet and had had a hard time in foster home before us (serious sexual abuse by caregiver, although he wouldn't tell anyhone because "who would believe me?") He would sometimes act out, but usually was a nice boy and my other kids remember him fondly. However, he had one bad habit. He told incredible stories/lies and expected us to believe them. Example: "When you weren't with me, a big shark came out of the river (river/shark...haha) and I had to wrestle it and kill it." This type of exaggerated storytelling was nonstop and when I asked if it had really happened he'd say, "YES!"
I don't know what it means. I never had a child who did this before. I assumed it was because his life had been so awful that he was making things up to seem like a hero, poor kid. I know that J. has had a GOOD life. Also, I never raised another child who did this. Mostly, the other kids told the truth, except to sometimes get out of trouble, or when my oldest daughter was using drugs. 35 is another story. He never made up stories, but he lied a lot and still does.
I don't have an answer for you, but wanted to share that I did know a child who did this. In my opinion it has less to do about imagination than a desperate desire to feel important thus make up stories in which the child is a hero. I think some of the content of J's lies are troubling and indicate a problems. A fascination with weapons, unless he was around them, would bother me. This other adopted child of ours never talked about knives or guns or anything. Is there anyone J could talk to at all?
At any rate, I know this isn't all that helpful, but wanted to share my experience...one I still don't understand. You made me curious and I'm going to go on my trusty search engine to see if it "means" anything.