I am interested in understanding when the stock market can influence real growth and the opposite, when real growth can influence the stock market. In other words, in which way causation is more likely to work?

In particular if stock market is growing, will GDP increase or will decrease?

After studying the Blanchard model, I found out that both ways are possible, in fact in its model there are two cases, good news and bad news, but it was never explained in my studies why in one particular market we are in the first case or in the second.

I only know that the answer depends somehow on market efficiency and if the country is still developing or not.

  • $\begingroup$ I highly doubt you could give a sound argument for causation. As with most (social) sciences, one is pretty much limited to correlations. There are plenty of studies, however, that indicate and incredibly weak correlation between the two. $\endgroup$
    – daOnlyBG
    Commented Nov 19, 2014 at 9:20
  • 1
    $\begingroup$ I'm not sure how this question is more broad than some of the other questions already out there. More comments could be helpful. If anything, I'd like to know where to go to find out more about this topic. $\endgroup$
    – jmbejara
    Commented Nov 19, 2014 at 15:24
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    $\begingroup$ Well, as Paul Samuelson famously put it: "The stock market has predicted 9 out of the last 5 recessions!" $\endgroup$
    – Steve S
    Commented Nov 20, 2014 at 9:42
  • $\begingroup$ Stock market affects real growth via wealth affect and via the route of cost of financing that is the interest rate. It is cyclic. A growing stock market will boost GDP as wealth of consumers increase and a growth in GDP will make the stock market grow. But of course, the growth comes with the cost of inflation which should be kept at optimum levels. And this gives rise to intervention which may break this cycle. $\endgroup$ Commented Nov 29, 2015 at 1:00


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