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Stock Prices and Real Economic Activity Empirical Results for Germany

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  • Forster, Katrin
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    Abstract

    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. --

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    Bibliographic Info

    Paper provided by Deutsche Bank Research in its series Research Notes with number 20.

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    Date of creation: 2005
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    Handle: RePEc:zbw:dbrrns:20

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    1. Martha Starr-McCluer, 2002. "Stock Market Wealth and Consumer Spending," Economic Inquiry, Western Economic Association International, vol. 40(1), pages 69-79, January.
    2. Steve Bond & Alexander Klemm & Rain Newton-Smith & Murtaza Syed & Gertjan Vlieghe, 2004. "The roles of expected profitability, Tobin's Q and cash flow in econometric models of company investment," IFS Working Papers W04/12, Institute for Fiscal Studies.
    3. Skander J. Van den Heuvel, 2002. "Does bank capital matter for monetary transmission?," Economic Policy Review, Federal Reserve Bank of New York, issue May, pages 259-265.
    4. Alexander Ludwig & Torsten Sløk, 2002. "The Impact of Changes in Stock Prices and House Priceson Consumption in OECD Countries," IMF Working Papers 02/1, International Monetary Fund.
    5. Alonso-Borrego, Cesar & Bentolila, Samuel, 1994. "Investment and Q in Spanish Manufacturing Firms," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 56(1), pages 49-65, February.
    6. Laurence Boone & Claude Giorno & Pete Richardson, 1998. "Stock Market Fluctuations and Consumption Behaviour: Some Recent Evidence," OECD Economics Department Working Papers 208, OECD Publishing.
    7. Hassapis, Christis & Kalyvitis, Sarantis, 2002. "Investigating the links between growth and real stock price changes with empirical evidence from the G-7 economies," The Quarterly Review of Economics and Finance, Elsevier, vol. 42(3), pages 543-575.
    8. Uwe Hassler, 2001. "Wealth and Consumption - A Multicointegrated Model for the Unified Germany," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), Justus-Liebig University Giessen, Department of Statistics and Economics, vol. 221(1), pages 32-44.
    9. Laurence Boone & Nathalie Girouard & Isabelle Wanner, 2001. "Financial Market Liberalisation, Wealth and Consumption," OECD Economics Department Working Papers 308, OECD Publishing.
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