Market capitalization and growth with nominal and real rigidities: the case of emerging economies

The purpose of the paper is to explain the positive and significant correlation between market capitalization as a ratio of GDP on the one hand and growth of per capita GDP on the other especially for emerging economies as revealed by annual data of 32 years for 35 countries. For this purpose, a New Keynesian DSGE model with nominal rigidity in the form of price stickiness and real rigidity in the form of investment adjustment cost is constructed. The positive and significant correlations observed from the data match the ones obtained from the model only for relatively small values of the price stickiness parameter, which is characteristic of emerging economies since the latter experience frequent price changes and high inflation, a fact established empirically. Both real and nominal frictions are crucial in reproducing the desired result. © 2020, Editorial Office, Indian Economic Review.