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Published online by Cambridge University Press: 26 March 2020
The terrorist attack on New York on 11 September 2001 caused considerable disruption to the US economy, and especially to the US financial markets. The initial reaction of the financial markets was to increase the discount factor on future profits and reduce future profit projections, and hence stock market valuations fell markedly, as can be seen from charts 1 and 2. This fall has been largely reversed since the attack, but markets have in general continued their decline from their peaks a year or so ago. Falls have been particularly precipitate since July 2001, with the German and French stock market indices falling by 20 per cent over the last three months, whilst the Canadian markets have fallen even more. Stock market falls of the scale we have seen since July are almost bound to impact on the level of economic activity in the major economies. They are likely to reduce the rate of growth of the world economy over the medium term as well as change the structure of saving and investment.
1 See for instance Kay, J. (2001), ‘What became of the New Economy?’, National Institute Economic Review, 177, pp. 56-69.
2 New technology stocks and shares are in the sectors Media, Software and Services, Technology Hardware and Equipment and Telecommunications Service Industry groups. For a discussion of these sectors see Kay (2001), op.cit.
3 This result is based on NiGEM definitions. The formula and data used on our model utilise a national accounts based indicator of the profit share rather than earnings of dividends - see NiGEM model manuals, 2001. This measure is used in the simulations reported in this Review, and it moves in a similar way to those constructed using earnings.
4 Our standard feedback rule is described in Barrell, R. and Dury, K. (2000), ‘Choosing the regime: macroeconomic effects of UK entry into EMU’, Journal of Common Market Studies, 30 (4), for instance. We have the monetary authorities cutting interest rates if inflation is below target or if a nominal aggregate is below its target, and the reverse if they are above. These are of course very stylised representations of monetary responses, but they do allow us to undertake policy analyses in a replicable way.
5 Indeed, as our models are approximately linear we may read into this that a similar size fall in equity prices in Europe and North America would have twice the effect in the first year in the USA as in Europe, with the UK being somewhere between the two.