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

Author

Listed:
  • 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)

Suggested Citation

  • Sami Alpanda & Adrian Peralta-Alva, 2010. "Oil Crisis, Energy-Saving Technological Change and the Stock Market Crash of 1973-74," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 13(4), pages 824-842, October.
    • Handle: RePEc:red:issued:07-126
    DOI: 10.1016/j.red.2010.04.003
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    More about this item

    Keywords

    Oil crisis; Capital obsolescence; Stock market crash;
    All these keywords.

    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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