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Stock Market Development and Cross-Country Differences in Relative Prices

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  • Borja Larrain

    (Pontificia Universidad Católica de Chile, Escuela de Administración)

Abstract

We document a positive correlation between stock market capitalization and price levels (wages) within the group of countries with poorly developed stock markets and a negative correlation between these two variables within the group of countries with more developed stock markets. This paper argues that there is a causal relationship behind these correlations. Stock markets initially stimulate growth, pushing the demand for nontradables and increasing prices and wages. Stock markets also promote a shift toward more capital-intensive technologies in the tradable sector, increasing the migration of workers to services and eventually putting downward pressure on wages and prices. (c) 2010 The President and Fellows of Harvard College and the Massachusetts Institute of Technology.

Suggested Citation

  • Borja Larrain, 2010. "Stock Market Development and Cross-Country Differences in Relative Prices," The Review of Economics and Statistics, MIT Press, vol. 92(4), pages 784-797, November.
  • Handle: RePEc:tpr:restat:v:92:y:2010:i:4:p:784-797
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    Cited by:

    1. Nakamura,Shohei & Harati,Rawaa & Lall,Somik V. & Dikhanov,Yuri M. & Hamadeh,Nada & Vigil Oliver,William & Rissanen,Marko Olavi & Yamanaka,Mizuki, 2016. "Is living in African cities expensive ?," Policy Research Working Paper Series 7641, The World Bank.
    2. Hong-Ghi Min & Sang-Ook Shin & Judith A. McDonald, 2015. "Income Inequality and the Real Exchange Rate: Linkages and Evidence," Annals of Economics and Finance, Society for AEF, vol. 16(1), pages 115-141, May.
    3. Manganelli, Simone & Popov, Alexander, 2015. "Financial development, sectoral reallocation, and volatility: International evidence," Journal of International Economics, Elsevier, vol. 96(2), pages 323-337.

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