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The 1929 stock market: Irving Fisher was right

  • Ellen R. McGrattan
  • Edward C. Prescott

Many stock market analysts think that in 1929, at the time of the crash, stocks were overvalued. Irving Fisher argued just before the crash that fundamentals were strong and the stock market was undervalued. In this paper, we use growth theory to estimate the fundamental value of corporate equity and compare it to actual stock valuations. Our estimate is based on values of productive corporate capital, both tangible and intangible, and tax rates on corporate income and distributions. The evidence strongly suggests that Fisher was right. Even at the 1929 peak, stocks were undervalued relative to the prediction of theory.

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Paper provided by Federal Reserve Bank of Minneapolis in its series Staff Report with number 294.

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Date of creation: 2003
Date of revision:
Publication status: Published in International Economic Review (Vol. 45, No. 4, November 2004, pp. 991-1009)
Handle: RePEc:fip:fedmsr:294
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  1. Ray C. Fair & Matthew D. Shapiro & Kathryn M. Dominguez, 1986. "Forecasting the Depression: Harvard Versus Yale," NBER Working Papers 2095, National Bureau of Economic Research, Inc.
  2. Boyan Jovanovic & Peter L. Rousseau, 2001. "Liquidity Effects in the Bond Market," Vanderbilt University Department of Economics Working Papers 0117, Vanderbilt University Department of Economics.
  3. Martin Browning & Lars Peter Hansen & James J. Heckman, 1999. "Micro Data and General Equilibrium Models," Discussion Papers 99-10, University of Copenhagen. Department of Economics.
  4. Hamilton, James D. & Whiteman, Charles H., 1985. "The observable implications of self-fulfilling expectations," Journal of Monetary Economics, Elsevier, vol. 16(3), pages 353-373, November.
  5. McGrattan, Ellen R., 1994. "The macroeconomic effects of distortionary taxation," Journal of Monetary Economics, Elsevier, vol. 33(3), pages 573-601, June.
  6. Hurd, Michael D, 1989. "Mortality Risk and Bequests," Econometrica, Econometric Society, vol. 57(4), pages 779-813, July.
  7. John Y. Campbell & Robert J. Shiller, 2001. "Valuation Ratios and the Long-Run Stock Market Outlook: An Update," NBER Working Papers 8221, National Bureau of Economic Research, Inc.
  8. Ellen R. McGrattan & Edward C. Prescott, 2001. "Is the Stock Market Overvalued?," NBER Working Papers 8077, National Bureau of Economic Research, Inc.
  9. Attanasio, Orazio P & Weber, Guglielmo, 1995. "Is Consumption Growth Consistent with Intertemporal Optimization? Evidence from the Consumer Expenditure Survey," Journal of Political Economy, University of Chicago Press, vol. 103(6), pages 1121-57, December.
  10. Rosenzweig, Mark R & Wolpin, Kenneth I, 1993. "Credit Market Constraints, Consumption Smoothing, and the Accumulation of Durable Production Assets in Low-Income Countries: Investment in Bullocks in India," Journal of Political Economy, University of Chicago Press, vol. 101(2), pages 223-44, April.
  11. Lucas, Robert E, Jr, 1990. "Supply-Side Economics: An Analytical Review," Oxford Economic Papers, Oxford University Press, vol. 42(2), pages 293-316, April.
  12. Flood, Robert P & Hodrick, Robert J, 1990. "On Testing for Speculative Bubbles," Journal of Economic Perspectives, American Economic Association, vol. 4(2), pages 85-101, Spring.
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