Stock Prices and Real Economic Activity Empirical Results for Germany

Since the mid-1990s, large movements in stock prices have not only raised central bankers' and policy-makers' interest in their implications for real economic activity, but have also led to extensive empirical research in this field. While most of the studies have focussed on the United States or the euro area as a whole, this paper is one of the few providing empirical evidence for Germany. Despite the fact that the significance of equity markets remains much smaller in Germany than in other industrial countries, the empirical analysis confirms that stock price movements are relevant for the German economy: overall, stock price movements have had an impact on both domestic consumption and domestic private investment in recent years. Less surprisingly, the effects prove to be of much less significance than for other countries, in particular the United States, where stock market effects have been substantial. However, as it can be expected that the equity markets will gain further importance in Germany in the long term - e.g. in connection with the need for households to increase privately funded pensions and for many German companies to strengthen their equity and diversify their financing resources - the paper also concludes that the real economy will register more significant effects in future.