The Information-Technology Revolution and the Stock Market Jeremy Greenwood and Boyan Jovanic AER 1999

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# The Information-Technology Revolution and the Stock Market Jeremy Greenwood and Boyan Jovanic AER 1999 - PowerPoint PPT Presentation

The Information-Technology Revolution and the Stock Market Jeremy Greenwood and Boyan Jovanic AER 1999 A simple model ( a la Lucas 1978)

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## The Information-Technology Revolution and the Stock Market Jeremy Greenwood and Boyan Jovanic AER 1999

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The Information-Technology Revolution and the Stock MarketJeremy Greenwood and Boyan JovanicAER 1999
A simple model (a la Lucas 1978)

Simple exchange economy: many infinitely lived agents, and equally many “trees”, each tree yielding a “dividend” (output that goes to the owner) of dt at each period t.

The (stock market) price of a tree at time zero:

Lucas model – cont.

Notice that P0 is also the ratio: stock market value/output (S/GDP) since output=1.

An (expected) tech shock

News arrive at t=0 that a fraction x of existing trees will die at date T, and will be replaced by equally many better trees, yielding an output of 1+z. Thus output from T on will be:

Output over time is therefore,

The new trees will not trade in the stock market until they actually appear at T.

Two types of trees traded in the stock market, before T

Type-1 tree – dies at T, liquidation value of zero; before T its price is,

Type-2 tree – lives forever. It stock market value:

Stock market value before T

Recall that,

Hence if x goes up, overall market value goes down.

Stock market value: comparative statics (for t<T)
• Ptdecreases with x:
• more trees are expected to be replaced by trees that are not yet in the market (type 1);
• higher x increases consumption in the future, hence lowering U’: alpha down, P2 down.
• Pt decreases with z: same as (ii)
• Pt increases with T: longer life of present trees, thus their (present) value goes up (recall beta<1, hence if T goes to infinity, max value).
Stock market value afterT

At date T new trees pop up and start to be traded. Output per tree, hence also consumption and dividends rise permanently to (1 + xz). Hence,

Stock Market Value to GDP Ratio from GPT HT model

S falls faster than GDP in phase 1, but starts recovering before phase 2