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Stock Price Bubble and Trade Deficit in the Wake of a Large Technology Shock: The Case of the U.S

Author

Listed:
  • Zietz, Joachim

    (Middle Tennessee State University, Department of Economics and Finance)

Abstract

The paper develops a simple Solow-type growth model with endogenous stock price determination to explain the simultaneous occurrence of a stock market boom with subsequent bust and trade deficit in response to a large positive technology shock. The paper is meant to explain some of the open economy repercussions of the information technology revolution in the U.S. during the last two decades of the 20th century. The model incorporates an adjustment mechanism for stock prices that is tied to the rate of return on capital and the trade balance income ratio. The key model assumptions are verified empirically.

Suggested Citation

  • Zietz, Joachim, 2006. "Stock Price Bubble and Trade Deficit in the Wake of a Large Technology Shock: The Case of the U.S," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 59(2), pages 247-267.
    • Handle: RePEc:ris:ecoint:0087
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    More about this item

    Keywords

    U.S. trade deficit; stock prices; Solow growth model; technology shock;
    All these keywords.

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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