Can Technological Change Explain the Stock Market Collapse of 1974

Adrian Peralta-Alva ()

Macroeconomics from University Library of Munich, Germany

Abstract: This paper uses dynamic general equilibrium models to quantitatively test the idea that technical change caused the stock market collapse of the mid 1970's, its subsequent stagnation, and recovery. First, I consider the hypothesis that the arrival of information technologies (IT) rendered old capital obsolete, and led to a collapse of equity prices. I find that shocks necessary for the IT-revolution to cause the observed drop in Tobin's q imply a two-fold increase in aggregate investment, and a strong expansion in GDP and consumption. Such predictions are orthogonal to what one observes in the data. Next, I consider the hypothesis that the productivity slowdown of the mid 1970's caused an unexpected decrease in the growth rate of shareholders' income, and equity prices fell. This hypothesis is consistent with the behavior of aggregate quantities and it delivers a large decrease in the value of equities, but is not capable of producing the persistently low values of q that characterize the data. My analysis indicates that the main challenge for a general equilibrium explanation of stock market behavior resides in reconciling the movements of Tobin's q with those of aggregate investment.

Keywords: Stock; Market; Tobin; q; 1974; Technological; Change (search for similar items in EconPapers)
JEL-codes: E (search for similar items in EconPapers)
Pages: 52 pages
Date: 2002-11-05, Revised 2002-11-19
New Economics Papers: this item is included in nep-fin and nep-fmk
Note: Type of Document - ; prepared on IBM PC - PC-TEX/UNIX Sparc TeX; pages: 52
References: Add references at CitEc
Citations:

Downloads: (external link)
https://econwpa.ub.uni-muenchen.de/econ-wp/mac/papers/0211/0211002.pdf (application/pdf)

Related works:
Working Paper: Can technological change explain the stock market collapse of 1974? (2002)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpma:0211002

Access Statistics for this paper

More papers in Macroeconomics from University Library of Munich, Germany
Bibliographic data for series maintained by EconWPA ( this e-mail address is bad, please contact ).