Staff Report 294

The 1929 Stock Market: Irving Fisher Was Right

Edward C. Prescott Senior Monetary Advisor
Ellen R. McGrattan Consultant

Revised December 1, 2003

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.

RELATED PAPERS: Staff Report 309 Taxes, Regulations, and the Value of U.S. and U.K. Corporations, Staff Report 313 Average Debt and Equity Returns: Puzzling? and Quarterly Review articles (Vol. 24, No. 4, Fall 2000) The Declining U.S. Equity Premium and Is the Stock Market Overvalued?

Published In: International Economic Review (Vol. 45, No. 4, November 2004, pp. 991-1009)

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