On the propagation of the fluctuations of stock returns on growth: is the global effect important?

Abstract

Increasing capitalization in developed economies has attracted the attention of policymakers and economists with respect to the effects of unanticipated changes in stock returns on growth. This paper attempts to examine empirically the response of output growth to shocks in real stock returns. Evidence from OECD countries by use of Vector Autoregressions shows that output growth does not respond significantly to shocks in domestic real stock returns. The picture, however, changes when a shock in foreign (United States) real stock returns is considered. A portion of excess output volatility in these countries can be explained by innovations in foreign real returns, which indicates that in the global economic environment growth is more exposed to financial instability originating from abroad.