Breakdowns and revivals: the long-run relationship between the stock market and real economic activity in the G-7 countries

Using monthly observations of industrial production and stock market indices from January 1961 to May 2012, we analyse the long-run relationship between the stock markets and real economic activity in the G-7 countries. In particular, this analysis uses the Toda and Yamamoto (1995) approach with the leveraged bootstrap methodology that was proposed by Hacker and Hatemi-J (2006). Our results indicate that although the expected long-run relationship holds for most of the G-7 countries, a break in this relationship occurred in the 1980s, followed by a subsequent revival after 2001.