Asset market hangovers and economic growth: The OECD during 1984-93

Abstract

Asset prices and investment were unusually weak throughout the industrial world during the early 1990s. This paper highlights this stylized fact, and connects it with another: in most of the industrial world, asset markets boomed for several years before collapsing around 1989. The paper suggests that asset market bubbles during the late 1980s may have left the industrial world with an 'asset market hangover' in the early 1990s, in the form of sluggish asset markets and investment. Empirical support for this hypothesis is provided based on cross-country data for equity and real estate markets in most industrial countries. We suggest that financial market developments not justified by fundamentals can substantially affect real activity.