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

  • Adrian Peralta-Alva (Presenter)
  • Sami Alpanda

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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Paper provided by Econometric Society in its series Econometric Society 2004 Latin American Meetings with number 250.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:latm04:250
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