THE INFORMATION TECHNOLOGY REVOLUTION AND THE PUZZLING TRENDS IN TOBIN'S AVERAGE "q"

The market value of U.S. corporations declined by 50% during 1973-74 and stagnated for the following 15 years. This abrupt decline in market valuations coincided with two technology shocks: (1) the start of the information technology revolution and (2) a sudden slowdown in productivity growth. I use general equilibrium theory to quantify the macroeconomic and asset price implications of these two shocks. The information technology revolution and the productivity slowdown make the theory consistent with the trends of key macroeconomic aggregates from the mid-1970s to the 1990s, and can also account for most of the drop in market values. Copyright 2007 by the Economics Department Of The University Of Pennsylvania And Osaka University Institute Of Social And Economic Research Association.