The dynamic relationship between stock market development and economic activity: evidence from Peru, 1965-2011

We use real GDP per capita and three standard indicators of stock market development: value traded/GDP, market capitalization/GDP and turnover to study the short-run link between the stock market and economic activity in Peru. Based on annual time series data for the period 1965-2011, we estimate vector autoregressions (VARs) and identify approximate measures of stock market shocks using long-run restrictions. The results can be summarized as follows: (i) stock market indicators contribute to predict real GDP per capita growth only since the early 1990’s; (ii) a stock market shock has signicant short-run eects on real GDP per capita; however, its contribution to output dynamics has been small.The results imply that policy actions aimed at further developing the Peruvian stock market do have a signicant positive impact on the dynamics of economic growth.

Keywords

Output growth, stock market, VAR, long-run restrictions

JEL Classification

E23, G1