The authors are grateful for helpful comments and suggestions by participants in seminars at Brunel University, the Council of Economic Advisors, Denmark, the European University Institute, Oxford University, University of Copenhagen, University of Queensland, SUERF meeting in Brussels, November 2001, Christian Groth, Søren Johansen and particularly the editors Mike Wickens and Andrew Scott and three anonymous referees. John Gould and Randall Fox provided excellent research assistance.
Equity Prices, Productivity Growth and ‘The New Economy’
Article first published online: 11 JUL 2006
The Economic Journal
Volume 116, Issue 513, pages 791–811, July 2006
How to Cite
Madsen, J. B. and Philip Davis, E. (2006), Equity Prices, Productivity Growth and ‘The New Economy’. The Economic Journal, 116: 791–811. doi: 10.1111/j.1468-0297.2006.01112.x
- Issue published online: 11 JUL 2006
- Article first published online: 11 JUL 2006
- Submitted: 25 February 2003 Accepted: 11 March 2005
The sharp increase in equity prices over the 1990s was widely attributed to permanently higher productivity growth derived from the New Economy. This article establishes a rational expectations model of technology innovations and equity prices, which shows that under plausible assumptions, productivity advances can only have temporary effects on the fundamentals of equity prices. Using historical data on productivity of R&D capital, patent capital and fixed capital for 11 OECD countries, empirical evidence gives strong support for the model by suggesting that technological innovations indeed have only temporary effects on equity returns.