Oil crisis, Energy Saving Technological Change, and the Stock Market Collapse of 1974
The market value of U.S. corporations, relative to the replacement cost of their tangible assets, declined by about 50% in 1973-74, and stagnated at that level for the following decade. This collapse in market valuations exactly coincides with the Oil Crisis of October 1973. Over the 1973-78 period, the OPEC embargo translated into 44% increase in energy prices. This paper uses a calibrated dynamic general equilibrium model to quantitatively assess the impact of the energy price increase on the market value of U.S. corporations. In the model, energy-saving technologies are adopted as a response to an unexpected energy price shock. Investment in old, energy-intensive, technologies stops and their market value collapses. Our quantitative experiments match the share of energy in total costs, and the trends in the energy-output ratio of the U.S. economy. We find that the observed changes in energy prices can account for most of the observed drop in Tobin's average q
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