In an article dated Fall 2000, Ellen R. McGrattan and Edward C. Prescott write: "Some stock market analysts have argued that corporate equity is currently overvalued. But such an argument requires a point of reference: overvalued relative to what? In this study, we use as our reference point the predictions of the basic growth model that is the standard model used by macroeconomists today. We match up all the variables in our model with the U.S. national income and product accounts. "We find that corporate equity is not overvalued. Theory predicts that if net indebtedness is small, the value of corporate equity should equal the value of productive assets. We show that it does: both values are today near 1.8 times the value of GNP. With our estimates of productive assets, theory also predicts that the real returns on debt and equity should both be near 4 percent. Therefore, barring any institutional changes, we predict a small equity premium in the future." p. 33 of "Is the Stock Market Overvalued?" Federal Reserve Bank of Minneapolis QUARTERLY REVIEW Fall 2000. Buy! Jim Devine [EMAIL PROTECTED] & http://bellarmine.lmu.edu/~jdevine
