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The Information Technology Revolution and the Puzzling Trends in Tobin’s average q

  • Adrian Peralta-Alva

    (University of Miami)

A growing literature argues that the Information Technology rev- olution caused the stock market crash of 1973-1974, its subsequent stagnation and eventual recovery. This paper employs general equi- librium theory to test whether this good news hypothesis is consistent with the behavior of US equity prices and with the trends in corpo- rate output, investment and consumption. I …nd it is not. A model based exclusively on good news can make equity prices fall as much as in the data but it must also imply a strong economic expansion right when the US economy stagnated. However, when the observed productivity slowdown in old production methods is incorporated into the model consistency with major macroeconomic aggregates can be achieved and a 20% drop in equity values can be accounted for. (JEL E44, O33, O41)

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Paper provided by EconWPA in its series Macroeconomics with number 0511007.

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Length: 35 pages
Date of creation: 03 Nov 2005
Date of revision:
Handle: RePEc:wpa:wuwpma:0511007
Note: Type of Document - pdf; pages: 35
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