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The Changing Macroeconomic Response to Stock Market Volatility Shocks

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Abstract

There is substantial consensus in the literature that positive uncertainty shocks predict a slowdown of economic activity. However, using U.S. data since 1950 we show that the macroeconomic response pattern to stock market volatility shocks has changed substantially over time. The negative response of GDP growth to such shocks has become smaller over time. Further, while during earlier parts of our sample both a slowdown in consumption and investment growth contribute to a reduction of GDP growth, during later parts, only the investment reaction contributes to the GDP slowdown. A variance decomposition for consumption growth shows that the contribution of stock market volatility becomes negligible as we go from earlier to later parts of the sample, while the corresponding decomposition for investment growth reveals an increase in the role of stock market volatility.

Suggested Citation

  • Roel Beetsma & Massimo Giuliodori, 2011. "The Changing Macroeconomic Response to Stock Market Volatility Shocks," CESifo Working Paper Series 3652, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_3652
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    Cited by:

    1. Caggiano, Giovanni & Castelnuovo, Efrem & Groshenny, Nicolas, 2014. "Uncertainty shocks and unemployment dynamics in U.S. recessions," Journal of Monetary Economics, Elsevier, vol. 67(C), pages 78-92.
    2. Abid, Fathi & Bahloul, Slah & Mroua, Mourad, 2016. "Financial development and economic growth in MENA countries," Journal of Policy Modeling, Elsevier, vol. 38(6), pages 1099-1117.
    3. Netšunajev, Aleksei & Glass, Katharina, 2017. "Uncertainty and employment dynamics in the euro area and the US," Journal of Macroeconomics, Elsevier, pages 48-62.
    4. repec:gam:jecnmx:v:4:y:2016:i:1:p:16:d:65689 is not listed on IDEAS
    5. repec:eee:jmacro:v:53:y:2017:i:c:p:127-144 is not listed on IDEAS
    6. repec:eee:energy:v:140:y:2017:i:p1:p:185-197 is not listed on IDEAS
    7. Ibrahim, Mansor H. & Ahmed, Huson Joher Ali, 2014. "Permanent and transitory oil volatility and aggregate investment in Malaysia," Energy Policy, Elsevier, vol. 67(C), pages 552-563.
    8. Haroon Mumtaz, 2016. "The Evolving Transmission of Uncertainty Shocks in the United Kingdom," Econometrics, MDPI, Open Access Journal, vol. 4(1), pages 1-18, March.
    9. Islami, Mevlud & Kurz-Kim, Jeong-Ryeol, 2013. "A single composite financial stress indicator and its real impact in the euro area," Discussion Papers 31/2013, Deutsche Bundesbank.
    10. Choi, Sangyup & Loungani, Prakash, 2015. "Uncertainty and unemployment: The effects of aggregate and sectoral channels," Journal of Macroeconomics, Elsevier, vol. 46(C), pages 344-358.
    11. Wei, Yanfeng & Guo, Xiaoying, 2016. "An empirical analysis of the relationship between oil prices and the Chinese macro-economy," Energy Economics, Elsevier, vol. 56(C), pages 88-100.

    More about this item

    Keywords

    Dow Jones index; stock market volatility shocks; economic growth; consumption; investment; sample splits;

    JEL classification:

    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General

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