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Oil Crisis, Energy-Saving Technological Change and the Stock Market Crash of 1973-74

Author Info

Listed author(s):
  • Sami Alpanda

    (Amherst College)

  • Adrian Peralta-Alva

    (Federal Reserve Nank of St. Louis)

Abstract

The market value of U.S. corporations was nearly halved during the oil crisis of 1973-74. In this paper, we investigate the hypothesis that the sharp rise in energy costs during this period resulted in the obsolescence of firms' existing capital and reduced their market value. To quantify this obsolescence channel of the energy crisis, we simulate a calibrated dynamic general equilibrium model, where firms adopt energy-saving technologies along with the rise in energy prices, and the value of their installed capital falls due to investment irreversibility. We find that this channel can account for a third of the decline in Tobin's q observed in the data. Separately, we consider the role of investment subsidies extended by the government during this period to expedite the adoption of energy-saving technologies. This extension of the model can account for more than half of the decline in q. We also find empirical support for the capital obsolescence channel in cross-sectional regressions, where we show that the sectoral variation in the decline of energy use following the crisis is significant in explaining the sectoral variation in the drop of market values. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1016/j.red.2010.04.003
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Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 13 (2010)
Issue (Month): 4 (October)
Pages: 824-842

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Handle: RePEc:red:issued:07-126
DOI: 10.1016/j.red.2010.04.003
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Keywords: Oil crisis; Capital obsolescence; Stock market crash;

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Find related papers by JEL classification:
  • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
  • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
  • G01 - Financial Economics - - General - - - Financial Crises
  • O30 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - General

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Cited by:

  1. Sami Alpanda & Gino Cateau & Cesaire Meh, 2014. "A policy model to analyze macroprudential regulations and monetary policy," BIS Working Papers 461, Bank for International Settlements.
  2. William Gavin & Benjamin Keen & Finn Kydland, 2015. "Monetary Policy, the Tax Code, and the Real Effects of Energy Shocks," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(3), pages 694-707, July.
  3. Robert Kirkby, 2017. "Convergence of Discretized Value Function Iteration," Computational Economics, Springer;Society for Computational Economics, vol. 49(1), pages 117-153, January.
  4. Gallegati, Marco & Ramsey, James B., 2013. "Structural change and phase variation: A re-examination of the q-model using wavelet exploratory analysis," Structural Change and Economic Dynamics, Elsevier, vol. 25(C), pages 60-73.
  5. Yazid Dissou & Lilia Karnizova & Qian Sun, 2015. "Industry-level Econometric Estimates of Energy-Capital-Labor Substitution with a Nested CES Production Function," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 43(1), pages 107-121, March.
  6. Zubarev, Andrey V. & Polbin, Andrey V., 2016. "Estimation of Macroeconomic Effects from the Decline in Oil Export Duty," Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 6, pages 8-35, December.
  7. Kilponen, Juha & Verona, Fabio, 2016. "Testing the Q theory of investment in the frequency domain," Research Discussion Papers 32/2016, Bank of Finland.
  8. Takeshi Niizeki, 2012. "Energy-Saving Technological Change in Japan," Global COE Hi-Stat Discussion Paper Series gd11-218, Institute of Economic Research, Hitotsubashi University.
  9. Finn E. Kydland & Fei Mao & William T. Gavin, 2011. "Monetary Policy, the Tax Code, and Energy Price Shocks," 2011 Meeting Papers 1160, Society for Economic Dynamics.
  10. Sami Alpanda & Uluc Aysun, 2010. "Bank globalization and the balance sheet channel of monetary transmission," Working papers 2010-20, University of Connecticut, Department of Economics.
  11. Gallegati, Marco & Ramsey, James B., 2013. "Bond vs stock market's Q: Testing for stability across frequencies and over time," Journal of Empirical Finance, Elsevier, vol. 24(C), pages 138-150.

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