Stock Prices and Output Growth: An Examination of the Credit Channel

1. Evidence suggests that movements in stock prices precede movements in real GDP. Does this mean that changes in stock prices necessarily cause the changes in real GDP that follow? Explain.

2. What is the credit channel? How does it work?

3. What data does the article cite as evidence of the credit channel?

4. What is the risk premium and how is it determined?

5. How does the risk premium change over the business cycle? How is it related to future real GDP growth?

Source: “Stock Prices and Output Growth: An Examination of the Credit Channel.” Charles T. Carlstrom, Timothy S. Fuerst, and Vasso P. Ioannidou, Federal Reserve Bank of Cleveland Economic Commentary, August 15, 2002, pp. 1-3.