Working Paper: NBER ID: w10548
Authors: Paul Beaudry; Franck Portier
Abstract: In this paper we show that the joint behavior of stock prices and TFP favors a view of business cycles driven largely by a shock that does not affect productivity in the short run -- and therefore does not look like a standard technology shock -- but affects productivity with substantial delay -- and therefore does not look like a monetary shock. One structural interpretation we suggest for this shock is that it represents news about future technological opportunities which is first captured in stock prices. We show that this shock causes a boom in consumption, investment and hours worked that precede productivity growth by a few years. Moreover, we show that this shock explains about 50\\% of business cycle fluctuations.
Keywords: Stock Prices; Total Factor Productivity; Business Cycles; Expectations
JEL Codes: E3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| stock prices movements (G10) | expectations about future economic developments (E66) |
| shock related to stock prices (G17) | boom in consumption (E20) |
| shock related to stock prices (G17) | boom in investment (E22) |
| shock related to stock prices (G17) | boom in hours worked (J29) |
| shock related to stock prices (G17) | productivity growth (O49) |
| innovations in stock prices (G17) | future TFP growth (O49) |
| shock related to stock prices (G17) | economic activity before productivity increases (O49) |