《《the stock market and investment》.pdf

NBER WORKING PAPER SERIES THE STOCK MARKET AND INVESTMENT Robert J. Barro Working Paper No. 2925 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 April 1989 Prepared for presentation at the National Bureau of Economic Research conference on Stock Market Volatility, Puerto Rico, March 1989. This research is supported by the National Science Foundation. I am grateful for comments from Fischer Black, Changyong Rhee, Bill Schwert, and Larry Summers and for research assistance from Xavier Sala I Martin. This paper is part of NBERs research program in Economic Fluctuations. Any opinions expressed are those of the author not those of the National Bureau of Economic Research. NBER Working Paper #2925 April 1989 THE STOCK MARXET AND INVESTMENT ABSTRACT Changes in real stock-market prices have a lot of explanatory value of the growth rate of U.S. aggregate business investment, especially for long samples that begin in 1891 or 1921. Moreover, for the period since 1921 where data on a q-type variable are available, the stock market dramatically outperforms q. The change in real stock prices also retains its predictive value in the presence of a cash-flow variable, such as after-tax corporate profits. Basically similar results apply to Canadian investment, except that the U.S. stock market turns out to have move preditive power than the Canadian market. I discuss some possible explanations for this puzzling finding, but none of the explanations seem all that convincing. Robert J. Barro Department of Economics