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Essay on How the Stock Market Affects The Economy
The importance of stock markets is growing around the world and has opened a new avenue of research into the relationship between financial development and economic growth, which focuses on the effects of stock market development. Various stock market development indicators have been found to explain part of the variation of growth rates across countries, in some cases over and above the effects of the banking system.
“the stock market effects of four other key economic reforms--macroeconomic stabilization (such as inflation controls), privatization of government-run industries, the removal of exchange controls, and trade liberalization”. Peter Henry, Associate Professor of Economics,
A situation in which stock market prices have been rising steadily for a considerable period. Such a rise, once started, tends to continue, because people who do not normally speculate on the stock market tend to be drawn in, attracted not only by high dividends but also by the prospect of capital gains. Further, such amateur speculators are almost invariably incurable optimists.
Therefore, the "bears" find that they are consistently wrong. But most "bears" on the stock market are professional speculators and so are interested in relatively short-run profits; they are not the sort of people who would be willing to back their pessimism by withdrawing from the market and holding capital balances, or Mi. Instead, they will revise their judgments and get in on the boom. In other words, the required amount of M i may become very small, so far as both uncertainty and speculative balances go.If the movement continues long enough, more and more people will come to believe that the movement cannot continue and will raise their requirements for M i. When a stock market is involved, the apparent ease of liquidation makes the reversal precipitous................
