Causal relationship between asset prices and output in the US: Evidence from state-level panel Granger causality test
Beatrice Desiree Simo-Kengne,
Tsangyao Chang and
No 201411, Working Papers from University of Pretoria, Department of Economics
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.
Keywords: House prices; stock prices; output; granger causality (search for similar items in EconPapers)
JEL-codes: C32 G10 O18 (search for similar items in EconPapers)
Pages: 30 pages
New Economics Papers: this item is included in nep-ger and nep-ure
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Persistent link: https://EconPapers.repec.org/RePEc:pre:wpaper:201411
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