The macroeconomics of stock prices in the medium term and in the long run

In this paper we develop a macro-model of stock prices that predicts that the growth rates in real stock prices and real dividends gravitate towards predictable constants in the long run, but fluctuate on approximately decennial frequencies due to movements in capital's income share. The model can be used to analyse the effects on stock prices of technology shocks, supply shocks, imperfections in the credit markets, change in taxes, and whether stocks are less risky in the long run than in the short run. Using macroeconomic data over 130 years for 22 OECD countries, the data give support for the model.