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Oil crisis, Energy Saving Technological Change, and the Stock Market Collapse of 1974

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  • Adrian Peralta-Alva (Presenter)
  • Sami Alpanda

Abstract

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

Suggested Citation

  • Adrian Peralta-Alva (Presenter) & Sami Alpanda, 2004. "Oil crisis, Energy Saving Technological Change, and the Stock Market Collapse of 1974," Econometric Society 2004 Latin American Meetings 250, Econometric Society.
    • Handle: RePEc:ecm:latm04:250
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    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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