Panel analysis of 20 industrial countries shows evidence for pro-cyclicality of capital gains on domestic stock markets - in particular over a medium term horizon. Thus, with cross-border ownership of portfolio equity investments, potential for international smoothing of domestic output fluctuations by means of the capital gains channel is found. Individual country analysis reveals substantial heterogeneity of cyclicality patterns. Evidence suggests that this cross-country variation can be explained by the level of economic development and the size of financial markets.
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