Market Shocks in the G7 Countries

Azad, Nahiyan; Serletis, Apostolos

This paper investigates the impact of unanticipated increases in share prices on economic activity in the G7 countries — Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States. Share prices contain information about the current and future state of the economy. We investigate whether different measures of optimism, all of which contain the unanticipated increase in share prices, affect key macroeconomic variations. In particular, do bouts of optimism stimulate economic growth? If so, are the economic booms sustained for a long period of time? To answer our research questions, we use structural vector autoregression models, and three different identification strategies. We address the interdependence between interest rate shocks and stock market shocks, using short-run and long-run restrictions, as in Bjørnland and Leitemo (J Monet Econ 56(2): 275–282, 2009). We use pure sign restrictions, as in Uhlig (J Monet Econ 52(2): 381–419, 2005). We also implement the theory and numerical algorithms for zero and sign restrictions, recently developed by Arias et al. (Econometrica 86(2): 685–720, 2018).