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Equity Prices, Productivity Growth, And ‘The New Economy’

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  • Jakob B Madsen
  • E Philip Davis

Abstract

The increase in equity prices over the 1990s has to a large degree been attributed to permanently higher productivity growth that is derived from the ‘new economy’ and related research and development (R&D) expenditures. This paper establishes a rational expectations model of technology innovations and equity prices, which shows that under plausible assumptions,productivity advances can only have temporary effects on fundamentals of equity prices. Using data on R&D capital and fixed capital productivity for 11 OECD countries, the evidence give strong support for the model by suggesting that technology innovations indeed have only temporary effects on equity returns.

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Bibliographic Info

Paper provided by Economics and Finance Section, School of Social Sciences, Brunel University in its series Economics and Finance Discussion Papers with number 03-04.

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Length: 31 pages
Date of creation: Feb 2003
Date of revision:
Handle: RePEc:bru:bruedp:03-04

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Postal: Brunel University, Uxbridge, Middlesex UB8 3PH, UK

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