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Causal relationship between asset prices and output in the US: Evidence from state-level panel Granger causality test

  • Furkan Emirmahmutoglu


    (Department of Econometrics, Gazi University, Turkey)

  • Mehmet Balcilar


    (Department of Economics, Eastern Mediterranean University, Famagusta, North Cyprus,via Mersin 10, Turkey)

  • Nicholas Apergis


    (Department of Banking and Financial Management, University of Piraeus, Greece)

  • Beatrice D. Simo-Kengne


    (Department of Economics, University of Pretoria)

  • Tsangyao Chang


    (Department of Finance, Feng Chia University, Taichung, Taiwan)

  • Rangan Gupta


    (Department of Economics, University of Pretoria)

This paper investigates the causal relationship between asset prices and per capita output across 50 US states and the District of Columbia over 1975 to 2012. A bootstrap panel Granger causality approach is applied on a trivariate VAR comprising of real house prices, real stock prices and real per capita personal income (proxying output), which allows us to account not only for heterogeneity and cross-sectional dependence, but also for interdependency between the two asset markets. Empirical results reveal the existence of a unidirectional causality running from both asset prices to output. This confirms the leading indicator property of asset prices for the real economy, while also substantiating the wealth and/or collateral transmission mechanism. Moreover, the absence of reverse causation from the personal income per capita to both housing and stock prices tend to suggest that non-economic fundamentals may have played an important role in the formation of bubbles in these markets.

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Paper provided by University of Pretoria, Department of Economics in its series Working Papers with number 201411.

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Length: 30 pages
Date of creation: Mar 2014
Date of revision:
Handle: RePEc:pre:wpaper:201411
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