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

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.