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

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Jakob B Madsen
E Philip Davis

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

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

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

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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Jakob B Madsen & Costas Milas, 2005. "The price-dividend relationship in inflationary and deflationary regimes," Keele Economics Research Papers KERP 2005/09, Centre for Economic Research, Keele University. [Downloadable!]
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  2. Marika Karanassou & Hector Sala & Dennis J. Snower, 2007. "The Evolution of Inflation and Unemployment: Explaining the Roaring Nineties," Kiel Working Papers 1350, Kiel Institute for the World Economy. [Downloadable!]
    Other versions:
  3. Jakob B. Madsen, 2003. "The Macroeconomics of Share Prices in the Medium Term and in the Long Run," EPRU Working Paper Series 03-11, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics. [Downloadable!]
  4. Zaman, Md Monowaruz, 2007. "The theoretical aspect of Muhammad Yunus’s dream-'putting poverty in museums'," MPRA Paper 1306, University Library of Munich, Germany, revised 02 Jan 2007. [Downloadable!]
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