TAILIEUCHUNG - THE 1929 STOCK MARKET: IRVING FISHER WAS RINGT

In the first, “op ti mis tic” sce nario, feed con ver- sion ra tios im prove pro gres sively. About 1 per cent more meat per year is pro duced per kilo gram of feed in de vel op ing coun tries, with a com pounded ef fect over time. This mir rors the rapid tech no logi- cal prog ress ob served in the de vel oped coun tries from the early 1980s to the early 1990s. Under the op ti mis tic sce nario, feed con ver sion ef fi ciency in de vel oped coun tries im proves by only . | Federal Reserve Bank of Minneapolis Research Department Staff Report 294 Revised December 2003 The 1929 Stock Market Irving Fisher Was Right Ellen R. McGrattan Federal Reserve Bank of Minneapolis and University of Minnesota Edward C. Prescott Arizona State University and Federal Reserve Bank of Minneapolis ABSTRACT__ Many stock market analysts think that in 1929 at the time of the crash stocks were overvalued. Irving Fisher argued just before the crash that fundamentals were strong and the stock market was undervalued. In this paper we use growth theory to estimate the fundamental value of corporate equity and compare it to actual stock valuations. Our estimate is based on values of productive corporate capital both tangible and intangible and tax rates on corporate income and distributions. The evidence strongly suggests that Fisher was right. Even at the 1929 peak stocks were undervalued relative to the prediction of theory. We thank two anonymous referees the editor and seminar participants at the Bank of Portugal the Federal Reserve Bank of Chicago the SED MIT the University of Michigan the University of Kansas and the Federal Reserve Bank of Kansas City for their helpful comments. We especially thank Kent Daniel and Lee Ohanian for comments on an earlier draft. We also thank the National Science Foundation for financial support. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System. Please address correspondence to Prescott Research Department Federal Reserve Bank of Minneapolis 90 Hennepin Avenue Minneapolis MN 55401-1804 . 1. Introduction Fisher Says Prices of Stocks Are Low said a headline hl the New York Times on October 22 1929 referring to economist Irving Fisher. Two days later the stock market crashed and by the end of November the New York Stock Exchange was down 30 .

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