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Equity Prices And The Real Economy – A Vector Error-Correction Approach

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  • Ray Barrell

    ()

  • E Philip Davis

    ()

Abstract

We assess the impact of equity prices on the level of output in the Europe Union economies and the US using Vector Error Correction (VECM) time series techniques. The distinction between impacts in bank based and equity market based economies is shown to be important, with equity prices having a greater impact on output in market-based economies. Share prices are shown to be largely autonomous in variance decompositions, whilst equity price do have a strong impact on output in the UK and US in their variance decompositions. An analysis of impulse responses suggests that large market based economies have more effective fiscal and monetary policy instruments.

Suggested Citation

  • Ray Barrell & E Philip Davis, 2005. "Equity Prices And The Real Economy – A Vector Error-Correction Approach," Economics and Finance Discussion Papers 05-13, Economics and Finance Section, School of Social Sciences, Brunel University.
  • Handle: RePEc:bru:bruedp:05-13
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    File URL: http://www.brunel.ac.uk/329/efwps/05-13.pdf
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