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

The market value of US corporations declined by 50% during the period 1973-74 and stagnated for the following 15 years. This abrupt decline in market valuations coincided with a good news shock the start of the Information Technology Revolution and a bad news shock a slowdown in productivity growth -. I use general equilibrium theory to quantify the equity price and macroeconomic implications of these two shocks. The Information Technology Revolution and the observed productivity slowdown make the theory consistent with the secular trends of US corporate capital, output, and productivity from the mid 1970s to the 1990s. Most of the observed drop in market values can also be accounted for. Theories based exclusively on good news are shown to conflict with one or more of the main features of US aggregate data (JEL E44, O33, O41) ∗This paper is based on my Ph. D. dissertation at the University of Minnesota. I thank Michele Boldrin and Ellen McGrattan for their continuous support and advice. I am also grateful to the associate editor, three anonymous referees, David Kelly, Manuel Santos and Pere Gomis-Porqueras for several detailed comments on a previous version of the paper.