Stock Market Development and Cross-Country Differences in Relative Prices

Borja Larrain ()

The Review of Economics and Statistics, 2010, vol. 92, issue 4, 784-797

Abstract: We document a positive correlation between stock market capitalization and price levels (wages) within the group of countries with poorly developed stock markets and a negative correlation between these two variables within the group of countries with more developed stock markets. This paper argues that there is a causal relationship behind these correlations. Stock markets initially stimulate growth, pushing the demand for nontradables and increasing prices and wages. Stock markets also promote a shift toward more capital-intensive technologies in the tradable sector, increasing the migration of workers to services and eventually putting downward pressure on wages and prices. (c) 2010 The President and Fellows of Harvard College and the Massachusetts Institute of Technology.

Date: 2010
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