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Can technological change explain the stock market collapse of 1974?

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  • Adrian Peralta-Alva

    (Department of Economics, University of Minnesota & Research Department, Federal Reserve Bank of Minneapolis)

Abstract

This paper uses dynamic general equilibrium models to quantitatively test the idea that technical change caused the stock market collapse of the mid 1970's, its subsequent stagnation, and recovery. First, I consider the hypothesis that the arrival of information technologies (IT) rendered old capital obsolete, and led to a collapse of equity prices. I find that shocks necessary for the IT-revolution to cause the observed drop in Tobin's q imply a two-fold increase in aggregate investment, and a strong expansion in GDP and consumption. Such predictions are orthogonal to what one observes in the data. Next, I consider the hypothesis that the productivity slowdown of the mid 1970's caused an unexpected decrease in the growth rate of shareholders' income, and equity prices fell. This hypothesis is consistent with the behavior of aggregate quantities and it delivers a large decrease in the value of equities, but is not capable of producing the persistently low values of q that characterize the data. My analysis indicates that the main challenge for a general equilibrium explanation of stock market behavior resides in reconciling the movements of Tobin's q with those of aggregate investment.

Suggested Citation

  • Adrian Peralta-Alva, 2002. "Can technological change explain the stock market collapse of 1974?," Finance 0211001, EconWPA, revised 19 Nov 2002.
  • Handle: RePEc:wpa:wuwpfi:0211001
    Note: Type of Document - pdf; prepared on IBM PC - PC-TEX/UNIX Sparc TeX; pages: 52
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    Keywords

    Technological change stock market 1974 Tobin's q;

    JEL classification:

    • G - Financial Economics
    • E - Macroeconomics and Monetary Economics

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