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Equity Prices, Productivity Growth, and the 'New Economy'

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Author Info
Jakob B. Madsen (Institute of Economics, University of Copenhagen)
E. Philip Davis (Brunel University)

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Abstract

The sharp increase in equity prices over the 1990s was widely attributed to permanently higher productivity growth derived from the New Economy. 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 the fundamentals of equity prices. Using historical data on productivity of R&D capital, patent capital and fixed capital for 11 OECD countries, empirical evidence give strong support for the model by suggesting that technological innovations indeed have only temporary effects on equity returns.

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Publisher Info
Paper provided by Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics in its series EPRU Working Paper Series with number 04-05.

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Length: 45 pages
Date of creation: Feb 2004
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Handle: RePEc:kud:epruwp:04-05

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Related research
Keywords: new economy; productivity; economic growth; equity prices;

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Find related papers by JEL classification:
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
G3 - Financial Economics - - Corporate Finance and Governance
O4 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

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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 Madsen & Costas Milas, 2005. "The Price-Dividend Relationship In Inflationary And Deflationary Regimes," Econometrics 0506002, EconWPA. [Downloadable!]
    Other versions:
  2. 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!]
  3. Marika Karanassou & Hector Sala & Dennis J. Snower, 2007. "The Evolution of Inflation and Unemployment: Explaining the Roaring Nineties," IZA Discussion Papers 2900, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  4. Jakob B. Madsen & EPRU & FRU, 2007. "Semi-Endogenous Versus Schumpeterian Growth Models: Testing The Knowledge Production Function Using International Data," Monash Economics Working Papers 26/07, Monash University, Department of Economics. [Downloadable!]
    Other versions:
  5. Jakob B. Madsen, . "The Anatomy of Growth in the OECD since 1870: the Transformation from the Post-Malthusian Growth Regime to the Modern Growth Epoch," Monash Economics Working Papers 2009-14, Monash University, Department of Economics. [Downloadable!]
  6. Jakob B. Madsen, 2009. "Growth And Capital Deepening Since 1870: Is It All Technological Progress?," Monash Economics Working Papers 10/09, Monash University, Department of Economics. [Downloadable!]
  7. Zaman, Md Monowaruz, 2008. "An introduction to Economics of Information Biasing (EIB)," MPRA Paper 635, University Library of Munich, Germany, revised 15 Jun 2008. [Downloadable!]
  8. Jakob Madsen & Russell Smyth, 2008. "Is The Output-Capital Ratio Constant In The Very Long Run?," Monash Economics Working Papers 10/08, Monash University, Department of Economics. [Downloadable!]
  9. 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 28 Aug 2008. [Downloadable!]
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