Causal Relationship between Asset Prices and Output in the United States: Evidence from the State-Level Panel Granger Causality Test

Abstract

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 noneconomic fundamentals may have played an important role in the formation of bubbles in these markets.

Macroeconomic Shocks and Changing Dynamics of the U.S. REITs Sector

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Time-varying role of macroeconomic shocks on house prices in the US and UK: evidence from over 150 years of data

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The role of housing sentiment in forecasting U.S. home sales growth: evidence from a Bayesian compressed vector autoregressive model

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