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

Furkan Emirmahmutoglu (), Mehmet Balcilar (), Nicholas Apergis (), Beatrice Desiree Simo-Kengne, Tsangyao Chang () and Rangan Gupta ()

No 201411, Working Papers from University of Pretoria, Department of Economics

Abstract: 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
Date: 2014-03
New Economics Papers: this item is included in nep-ger and nep-ure
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