Oil crisis, Energy Saving Technological Change, and the Stock Market Collapse of 1974

Adrian Peralta-Alva () and Sami Alpanda
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Sami Alpanda: Dept of Economics University of Minnesota

Macroeconomics from University Library of Munich, Germany

Abstract: The market value of U.S. corporations, relative to the replacement cost of their tangible assets, declined by about 50% in 1973-74, and stagnated at that level for the following decade. This collapse in market valuations exactly coincides with the Oil Crisis of October 1973. Over the 1973-78 period, the OPEC embargo translated into 44% increase in energy prices. This paper uses a calibrated dynamic general equilibrium model to quantitatively assess the impact of the energy price increase on the market valuation of U.S. corporations. The key features of the model are the technology-specific nature of capital, the irreversibility of investment decisions, and the induced innovation hypothesis. In the model, the arrival of a new energy-saving technology coincides with the increase in energy prices; rendering old capital obsolete, and its market value to collapse. In the data, the number of patents granted to enery-saving technologies increased in the mid 1970's, which gives empirical support to the induced innovation hypothesis. We find the observed changes in energy prices, together with the energy saving change implied in the observed energy output data, generate an 17% drop in Tobin's q; slightly more than a third of what is observed in the data.

Keywords: Energy; Tobin's; q; 1974; Stock; Market (search for similar items in EconPapers)
JEL-codes: E (search for similar items in EconPapers)
Date: 2003-07-14
New Economics Papers: this item is included in nep-ino
Note: Type of Document - PDF; prepared on IBM PC - PC-TEX/UNIX Sparc TeX; to print on PS
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Related works:
Working Paper: Oil crisis, Energy Saving Technological Change, and the Stock Market Collapse of 1974 (2006)
Working Paper: Oil crisis, Energy Saving Technological Change, and the Stock Market Collapse of 1974 (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpma:0307007

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