Asset Prices and Real Economic Activity

A survey of the literature on asset price impacts on the real economy shows a much wider range of work on consumption and related wealth effects than on investment. The existence of wealth effects on consumption is little contested, but there remains an issue of whether different effects should hold between countries and across assets. There is less empirical work available on investment, partly reflecting poor results for Tobin?s Q, the user cost of capital and the financial accelerator. Panel investment functions for up to 23 OECD countries are estimated. Significant asset price effects from the financial accelerator and Tobin?s Q are found especially for the G7 countries as well as uncertainty effects as proxied by asset price volatility, but they only matter for the smaller OECD countries.