Category Archives: Global economy

From Main Street to Wall Street

My book – From Main Street to Wall Street (link) – has been published. This blog post explains why I wrote the book and its contents. The next three posts (that will be sent out in due course) will present some of the analyses and conclusions from the book.


Let me start in 2008. The financial crisis was at its worst.

I was a young professor of finance. I studied financial crises (my Ph.D. is on currency crises) and the relation between the macroeconomy and expected stock returns.

One day, I was invited to a TV program. I was asked to explain something in relation to the crisis. I do not remember the exact topic, but the appearance revealed that I have an ability to explain complicated financial issues in simple terms. There was a need for people with such skills, as many found it difficult to understand what was going on during the financial crisis. I decided that it was part of my duty as a professor at a publicly funded university to help people understand the complicated interactions between the financial sector and the real economy that were brought to surface during the financial crisis. Back then, I became something like an “academic TV star” in Denmark.

A couple of years after the crisis, in 2012, the then Danish government established a commission. Its task was to evaluate the causes and consequences of the financial crisis in Denmark. Due to my presence in the Danish debate and my research on this area, I was asked to be its chairman. I accepted the offer.

The next couple of years, I worked day and night. The report – today called the “Rangvid-report” (link) – was published in autumn 2013.

The decision to write a book

At some point in 2015, or was it 2016, i.e. a couple of years after the report, I started talking to myself about my next big project. With “project financial crisis” completed, I felt I somehow needed a new project. I decided to write a book.

I did not want to stress myself. I have been writing when time has allowed it. Sometimes, I have been able to write a lot. At other times, several months have passed when I was not able to write anything. This has been fine. No stress. In fact, an enjoyable process.

What should its topic be? The obvious topic would have been the financial crisis, given my involvement here. But, as mentioned, I had just completed writing the report of the financial crisis, and everybody else were writing books on the financial crisis. It should be something different.

I am and always have been fascinated by financial economics. Economic growth determines so many things in life. Financial markets help people fulfill some of their big dreams: buy a house, save for retirement. I have done research on the relation between the macroeconomy and financial markets. I decided the book should deal with this.

I am an empirical economist. I have done formal theory when I was young, but I have to come to realize that I do not have a comparative advantage here. Hence, I wanted the book to be a fact-based book on the relation between the economy and financial markets.

I started investigating the market. I was surprised.

Every day, newspapers and business magazines cover the latest macroeconomic news, not least to help investors navigate financial markets. Is falling unemployment good for stocks because it indicates the economy is doing well? Or, is it bad because the central bank will then start tightening monetary policy, potentially hurting stocks? Will countries expected to grow fast provide higher returns? How will economic developments affect financial markets?

Given the attention academics and investors devote to understanding the economy and its impact on financial markets, it was somewhat surprising to me that no well-known book focusing on the relation between the economy and the stock market, and targeted towards a broader audience, existed. I decided that my book should aim at filling this gap.

Of course, there are related books. The one closest to mine is probably “The long good buy” by Peter Oppenheimer (link). I like to think that my book is more thorough and has a firmer anchoring in the academic theories, given my background as an academic and Oppenheimer’s as a practitioner. Also, my book has this structure with the long and the shorter run. Lastly, and probably most importantly, I carefully explain how we can use the insights from the theories and historical evidence to formulate predictions about the future. This being said, Oppenheimer’s book is a great extra reading if you are interested in these topics.

Other related books could be “Stocks for the Long Run” by Jeremy Siegel (link), “Expected Returns: An Investor’s Guide to Harvesting Market Rewards” by Antti Ilmanen (link), and “Financial Markets and the Real Economy”, edited by John Cochrane (link). These are all great books, but they cover different aspects of the topic. Siegel’s book is a description of the stock market on the long run, whereas my book relates the stock markets to the underlying economy, over the short and the long run. “Expected Returns” focuses on providing a comprehensive overview of theories of expected returns on different asset classes, whereas my book focuses on the relation between the macroeconomic and equity markets, over the long run and the business cycle. “Financial Markets and the Real Economy” is a collection of academic articles written by many different authors, i.e. it serves a very different purpose and targets a very different audience than my book, even when the title indicates the same topic.

Writing style

The book is written in a style similar to this blog. Of course, this is a blog, so my language here is sometimes less formal than what I use in the book, but the use of tables and figures to provide a fact-based background to the relation between financial markets and the economy is similar to this blog.

I decided that my book should be academic in nature, but written in a style that is accessible to a broader audience. For instance, the book does not contain formulas or equations, except like “Real equity returns = Nominal equity returns – inflation, “Equity returns = dividend yield + capital gains”, and the like. The book presents the academic theories relating to the different topics, but in a way that should be understandable for interested non-academic readers and students.

An important characteristic of the book is its reliance on the data. Figures and tables richly illustrate and back up arguments and theories. The book is empirical in nature.

I wanted the book to be reasonably comprehensive. Its purpose is to give the reader a thorough understanding of how economic activity affects equity returns. Also, in some chapters, equity returns are compared to interest rates and bond returns.

All chapters end with a checkpoint list that summarizes key insights.

Table of Contents

A guiding principle in the book is that movements in economic activity contain a long-run and a business-cycle component. Over the long run, economies grow. Over shorter horizons – over the business cycle – economic activity fluctuates. My book examines both the long-run relation between economic growth and stock returns as well as the business-cycle relation.

After a first part that introduces fundamental stylized facts and important concepts, the remaining parts of the book are structured around the long-run and short-run relations. In my book, the long run refers to multiple years or decades. The short run to months or a few years.

Over the long run, economies grow. The rate at which an economy grows over the long run is the determinant of whether a country is rich or poor. Expectations to developments in economic activity over the long run help us formulating expectations to returns from financial assets over the long run. When a 25-year old individual asks how much he/she should save to live a decent life after retirement, i.e. after many years, the answer will not least depend on what we expect financial assets to return over the next many years. And, the answer to that question in turn depends on how fast we expect economy activity to grow over the long run. The second part of this book explains what we know about long-run economic growth, about returns on stocks over the long run, and about the relation between long-run economic growth and stock returns.

Over the short run, economic activity fluctuates. Sometimes even substantially so. There are years when the economy is booming, unemployment is low, and times are good. At other times, in recessions, economic activity falls, people are laid off, and times are rough. The recurrent alternations between good times and rough times is the business cycle. Economic activity and the stock market share a common business-cycle pattern. The level of economic activity and the value of stocks rise and fall jointly throughout the business cycle. In order to understand why stock returns are sometimes high and why they are sometimes low, it helps to understand business-cycle fluctuations in economic activity. The third part of the book explains how economic activity and stock returns stocks are related over the business cycle. This part also describes monetary policy, as monetary policy plays an important role in understanding business-cycle fluctuations and stock markets. This part of the book also devotes one chapter to the financial crisis of 2008-2009, as an example of an economic and financial event that dramatically influenced economic activity and equity markets.

When we understand how economic activity relates to financial assets, over the long run and business cycles, we are better equipped to formulate expectations to future returns on financial assets, over the short run and over the long run. This is what the fourth part of the book deals with. It explains how economists judge the outlook for the economy, and it takes us through short-run and long-run stock-return predictability. I emphasize that there is considerable uncertainty surrounding return forecasts, but also that stock returns contain a small degree of predictability. Even if it seems small at first glance, it accumulates and has important implications for academics and practitioners alike.

A final, short, section contains my view on a few practical investment advices.

Publication process

Oxford University Press is the publisher of the book. OUP has done a great job setting up the book. It looks good. The cover is also cool. I am happy.

I handed in the manuscript in spring last year, right before corona arrived. This means that I did not manage to include a chapter on the corona-crisis. If there ever will be a second edition, it will include such a chapter. Until then, many posts on this blog describe different aspects of how the corona-crisis has affected the economy and stock markets.

I received the book in print a couple of weeks ago. It is a nice feeling having published a book.


This post has provided some background on why I wrote From Main Street to Wall Street and its contents. My next three posts will describe some of its key conclusions. The first post will be on the long-run relation between the economy and the stock market, the next on the business-cycle relation, and the final on how we can use those relations to say something about expected future returns.

The global cost of the crisis

Based on IMF forecasts, I calculate the global cost of the crisis as foregone (because of the pandemic) global economic activity up until 2024. The cost amounts to USD 23,600bn, a quarter of global output in 2019. The cumulative output loss is almost twice as large in developing and emerging economies as in advanced economies, though China is an outlier. The calculation represents a lower bound on the final cost, as economic activity might not recover until 2024. Also, the calculation does not include health-induced costs, the inclusion of which would further increase the cost.

As the final (at least for the time being) part of my analyses of the cost of the crisis (link and link), I present here my calculation of the global cost of the crisis.

I calculate the global cost of the crisis as the cumulative loss of global economic activity due to the crisis. This crisis is a health-induced crisis, though. In my previous posts, I calculated both the loss of economic activity and health-induced costs for Denmark. I am not aware of methods to estimate the size of health-induced costs on a global level. Hence, I restrict this analysis to the loss of global economic activity, but discuss health-induced costs.

Expected growth rates

I base my calculations on IMF forecasts for global economic activity. I take IMF’s forecasts from October 2019, when nobody expected the arrival of the pandemic, and compare them to the recent January 2021 IMF forecasts for global economic activity. Figure 1 summarizes IMF’s expectations:

Figure 1. Growth in global output during 2020 and the average annual growth rate during 2021-24. IMF forecasts from October 2019 and January 2021.

In October 2019, IMF expected global output to increase by 3.4% in real terms during 2020. There was no talk about a pandemic. Instead, the major risk mentioned was the uncertainty surrounding global trade and geopolitics (Trump and China).

2020 turned out to be so different. In their recent January 2021 WEO update, IMF now expects global output to contract by 3.5% in 2020. This means that the forecast error (= expectation in October 2019 – realized growth in 2020) amounts to 7%-point.

The pandemic and the resulting lockdowns caused this unprecedented recession. As a comparison, global output contracted by 0.1% “only” because of the financial crisis in 2009. In 2020, as mentioned, the contraction amounts to 3.5%. Globally, this recession has been so much more severe than the one following the financial crisis in 2009.

We do not have the final figures for 2020 yet. The 3.5% contraction for 2020 is a very good guess, though, given that we have the figures for the first three quarters of 2020 and higher frequency indicators for the last quarter, such as industrial production etc. Hence, I would be surprised if the final figure for 2020 turns out to be much different from this number, i.e. from a 3.5% reduction in global output.

Figure 1 also shows that global growth expectations for 2021-2024 have been revised upwards, compared to what was expected before the pandemic. In October 2019, IMF expected global output to increase by 3.6% per year on average during 2021-24. In January 2021, IMF expects the world economy to grow by 4.2% per annum during 2021-24. So, 2020 was worse than expected before the pandemic but 2021-24 is expected to be better. What do the revisions imply for the expected cumulative loss of economic activity during the 2020-2024 period?

The global loss of economic activity

Before the pandemic, in 2019, aggregate global output amounted to app. USD 87,500bn. In this figure, I calculate the path of global output expected before the pandemic (using growth rate expectations from October 2019) and contrast it with the path expected now, i.e. taking into account the actual 2020 development and current (January 2021) forecasts for global growth during 2021-24:

Figure 2. Paths of real global output, based on IMF forecasts from October 2019 and January 2021. Billions USD.
IMF WEOs and own calculations

In October 2019, the expectation was that global output would amount to app. USD 90,500bn in 2020 (in real terms). Instead, global output amounts to app. USD 84,500bn in 2020. In 2020, the world earned app. USD 6,000bn less because of the pandemic.

Figure 2 reveals that global output will most likely remain below the level expected before the pandemic during the next couple of years, in spite of the increase in expected growth over the next four years that Figure 1 illustrated.

In aggregate, during the 2020-2024 period, the difference between what was expected before the pandemic and what was realized in 2020 plus what is expected going forward from here amounts to USD 23,600bn. This is my estimate of the global cost of the pandemic. It is the value of foregone economic activity in 2020 plus the expected value of foregone economic activity up until 2024.

USD 23,600bn is a big number. To illustrate, it is 27% of 2019 global output. A quarter of one year’s global output has been lost due to the pandemic. It also (more or less) corresponds to the value of everything that is produced (GDP) in the still-largest economy in the world, the US, during one year. Or, more or less, one and a half times everything produced in China in a year. As a final illustration, it is app. 12 times Biden’s new stimulus package of USD 1,900bn.

Advanced vs. Developing and Emerging economies

The pandemic is global. The cost of the pandemic will not be shared equally among Advanced and Developing/Emerging economies, though.

This figure shows that the forecast error for 2020, i.e. the difference between expected 2020 growth and actual 2020 growth, was equally large for Advanced and Developing/Emerging economies. For both Advanced and Developing/Emerging economies, growth during 2020 turned out to be 6%-7%-points lower than expected before the pandemic:

Figure 3. Forecasts error for 2020 and forecast revisions for 2021-24 for output growth in Advanced and Developing/Emerging economies.

Advanced economies have provided substantial fiscal and monetary support to households and firms in 2020, as described elsewhere on this blog, helping to contain the contraction. Also, vaccines are expected to be widely available in Advanced economies during 2021, supporting the recovery as of summer 2021.

In contrast, it will take longer for vaccines to be rolled out in Developing/Emerging economies. Also, oil exporting and tourism-dependent Developing/Emerging economies have suffered particularly much, IMF mentions.

China differs from most other Developing/Emerging economies, as China has been successful in containing the pandemic after the initial outbreak in early 2020. Also, China has provided substantial fiscal and monetary support.

In total, this means that the cost of the pandemic will not be shared equally around the world. The output loss due to the pandemic will be 17% of 2019 GDP for Advanced economies, but will be almost twice as large, 31%, in Developing and Emerging economies. In Chinas, it will only be 7%:

The cost of the crisis in different parts of the world. Costs are the reductions in economic activity from 2020-2024 because of the pandemic, in relation to output in 2019.
IMF WEOs and own calculations.


There is considerable uncertainty surrounding the recovery. Will vaccines be rolled out according to plan, will we face new mutations that vaccines do not protect against, will consumers increase spending as much as we expect when restrictions as removed, etc.?

IMF presents up- and a downside forecasts that reflect this uncertainty. The calculations above are reasonably robust to the future risk scenarios. The reason is that the cost is mainly due to the contraction in 2020, and there is little uncertainty surrounding that by now.

Figure 4 presents the path of world output as expected before the pandemic and how it is expected to develop as of now, including up- and down-side scenarios:

Figure 4. Paths of real global output, based on IMF forecasts from October 2019 and January 2021. The January 2021 forecasts include an upside and a downside scenario. Billions USD.
IMF WEOs and own calculations.

The magnitude of the cost of the crisis is not much affected by this uncertainty. The cost of the crisis is reduced to 24% (from 27%) of 2019 global output in the positive scenario but increases to 29% of 2019 global output in the downside scenario.

Health-induced costs

This analysis calculates the cost of the crisis in terms of foregone output around the world. The crisis is a health-induced crisis, though. In my previous posts that estimated the costs of the crisis in Denmark , I factored in the economic value of the costs of premature mortality, health impairments, and mental health impairments.

A similar global calculation requires estimates of the value of a global statistical life, as well as estimates of the number of people experiencing severe health impairments because of the virus, as well as the number of people facing mental health impairments. I know of no good way to calculate these such on a global level. Hence, in this post, I calculate the part of the cost due to foregone economic activity. This is certainly an important number to know in itself.

To give one perspective on the health-induced costs, though, Cutler & Summers (link) estimate that the economic value of health-induced costs in the US is, largely, equal to the loss of economic activity for the US. They estimate the total US loss at USD 17 trillion and the loss of economic activity in the US to USD 7.5 trillion, i.e. the loss of US economic activity corresponds to app. 50% of the total US loss. I estimate that health-induced costs are significant for Denmark, too (link and link), but relatively smaller than those calculated by Cutler & Summers for the US.


The global recession caused by the pandemic has been unprecedented in terms of both its magnitude, its cause, as well as the policy response. Based on IMF forecasts for global economic activity up until 2024, I calculate the global cost of the crisis in terms of foregone economic activity around the world. The global cost of the crisis amounts to app. USD 23,600 bn. It is an unfathomable number. It is the value of the reduction in cumulative global output resulting from the crisis. It is income that would have been generated around the world was it not for the pandemic. It corresponds to a quarter of total economic output in 2019.

As I do not have good estimates of global health-induced costs, I restrict the analysis to foregone economic activity. On the one hand, this means that the analysis is not an estimation of the total cost of the crisis (loss of economic activity + health-induced costs). On the other hand, it is certainly important to know the value of the loss of economic activity in itself.

I base my calculation on IMF data. In October 2019, IMF presented forecasts up until 2024. Hence, my calculations run until 2024. As shown in some of the figures above, global economic activity will in 2024 most likely not have reached the level expected before the crisis. Hence, the eventual global cost of the crisis might end out being higher than the number presented in this analysis.