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EQUITY MARKETS: TMT - The variable impact of wealth effects

Author: James Smalhout

First the tech stock collapse and now the September 11 terrorist attacks have produced cataclysmic shifts in the financial landscape.

Both look set to affect major economies for some time. But which will be more damaging? These two shocks are likely to have very different impacts from country to country, if experience from the 1990s is any guide.

Hali Edison and Torsten Sløk, two IMF economists, have been hard at work on research that throws light on this question. One of their papers – Wealth effects and the new economy (IMF Working Paper 01/77) – concludes that the moves of broad stock market indices affect retail sales most in the US and the UK, in percentage terms, and least in Germany, of four OECD countries studied. Japan falls about halfway in between.

The great and the good have been putting these issues under the microscope, very much in tune with the times. Stock market capitalizations tripled as a share of income in most G7 countries, except Japan, between 1994 and last year. So the impact of stock market moves on the total economy has become larger than ever.

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