Thesis advisor: Harold A. Petersen / This paper attempts to find the extent of the predictive power of the stock market in relation to consumption, non-residential investment, and corporate profits. Initially, a naïve model is formulated to assess the impact of the stock market on GDP, and then the model is used to find the predictive power of the stock market on the components. This component analysis compares the impact of the market on each of the components and attempts to find reasons for the variations in impact. Finally, the long term predictive power of the various models is assessed. / Thesis (BS) — Boston College, 2005. / Submitted to: Boston College. College of Arts and Sciences. / Discipline: Economics Honors Program.

Since the founding of the People’s Republic of China in 1949, China has experienced ten business cyclical fluctuations. The economic growth was characterized by erratic ups and downs which lasted for several decades. With the economic reform and opening up to the outside world in 1978 as part of Deng Xiaoping’s market-oriented policy, the Chinese economy grew exponentially and the volatility of the GDP growth rate declined significantly. The macroeconomic control policies in the 1980s prevented large fluctuations in the country’s economic development, and smoothed the output volatility further. This study examines the output volatility in China and our result reveals the standard deviation of quarterly output growth rate has declined dramatically. Using the CUSUM squares test and the Quandt-Andrews breakpoint test to identify unknown structure breaks, we identified two structural breaks: 1994:1 towards destabilization and 1998:1 towards stabilization. We then examine the stochastic process for GDP and the result shows that the decrease in volatility can be traced primarily to a decrease in the standard deviation of output shocks. Following this, we reached two other conclusions. First, there is a strong relationship between movements in output volatility and the movements in inflation volatility. Both output and inflation volatilities increased significantly during the third and fourth quarter of 1994 and both dropped sharply after 1996, which followed a similar path over the period. Second, using the standard decomposition of GDP, the decrease in output volatility can be traced to a decrease in the volatility of consumption, investment, and net export, especially rural consumption expenditure and residential investment.