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

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  • Jakob B. Madsen

    (Institute of Economics, University of Copenhagen)

  • E. Philip Davis

    (Brunel University)

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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Bibliographic 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
Date of revision:
Handle: RePEc:kud:epruwp:04-05

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

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  17. Fumio Hayashi, 1981. "Tobin's Marginal q and Average a : A Neoclassical Interpretation," Discussion Papers 457, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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