Energy, the stock market and the putty-clay investment model

My dissertation examines the relationship between the energy price shocks and securities market capitalization. One important historical episode, the energy crisis of 1973–74, is the focus of my study. Real energy prices jumped by 80% from 1973 to 1974. At the same time, the market value of firms plunged by 40%. My dissertation examines whether the energy crisis of 1973–74 was responsible for the dramatic decline in the market value of firms in 1974.; Chapter 1 of the dissertation provides the introduction. Chapter 2 develops a model with putty-clay specification to evaluate the impact of the energy price shock on the securities market in 1974. In a partial equilibrium putty-clay model where the real wage is held fixed, an 80% increase in real energy prices leads to a 10% decline in the market value of previously installed machines. Even this small effect exceeds what is found in the general equilibrium model. There, the energy price shock causes a decrease in the real wage, sufficient to offset the adverse impact of the increase in the energy cost on the value of capital. An 80% increase in the real energy prices causes the market value to decrease by only 2.2%. The theoretical analysis is supported by the observed decline in the real wage in 1974 of a magnitude comparable to that predicted by the model. The results from the general equilibrium model suggests that a broader set of forces was at work in causing the market downfall in 1974 than the energy cost increase alone. It is the compensation for labor which bears the force of the energy cost increase, not the claims to the capital stock.; Chapter 3 of my dissertation examines the cross-industry patterns of capital appreciation in four historical events involving radical energy price changes. A comparison of the cross-industry patterns of capital appreciation across these four episodes provides new evidence on whether the energy price shock was the dominant cause of the drastic decline in the securities market in 1974.