The Dynamic Relationship between Stock Market Development and Economic Activity Evidence from Peru, 1965-2011

Produced by: 
Pontificia Universidad Católica del Perú
Available from: 
December 2013
Paper author(s): 
Erick Lahura
Marco Vega
Topic: 
Financial Economics
Macroeconomics and Monetary Policy
Theory
Year: 
2013

We use real GDP per capita and three standard indicators of stock market development: value traded/GDP, market capitalization/GDP and turnover to study the short-run link between the stock market and economic activity in Peru. Based on annual time series data for the period 1965-2011, we estimate vector autoregressions (VARs) and identify approximate measures of stock market shocks using long-run restrictions. The results can be summarized as follows: (i) stock market indicators contribute to predict real GDP per capita growth only since the early 1990's; (ii) a stock market shock has significant short-run effects on real GDP per capita; however, its contribution to output dynamics has been small. The results imply that policy actions aimed at further developing the Peruvian stock market do have a significant positive impacts on the dynamics of economic growth.

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