The Stock Market Crash of 2008 Caused the Great Recession
NBER WORKING PAPER SERIES
THE STOCK MARKET CRASH OF 2008 CAUSED THE GREAT RECESSION: THEORY AND EVIDENCE Roger Farmer Working Paper 17479 http://www.nber.org/papers/w17479
NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 October 2011
This paper was prepared as a Plenary Address to the 17th International Conference in Economics and Finance, held at the Federal Reserve Bank of San Francisco, June 29th-July 1st 2011. I would like to thank the Society for Computational Economics and the Federal Reserve Bank of San Francisco for supporting this event and the organizers, Richard Dennis and Kevin Lansing, for inviting me to present my work. I would also like to thank Dmitry Plotnikov of UCLA for his invaluable research assistance. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research. © 2011 by Roger Farmer. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source.
The Stock Market Crash of 2008 Caused the Great Recession: Theory and Evidence Roger Farmer NBER Working Paper No. 17479 October 2011 JEL No. E0,E2 ABSTRACT This paper argues that the stock market crash of 2008, triggered by a collapse in house prices, caused the Great Recession. The paper has three parts. First, it provides evidence of a high correlation between the value of the stock market and the unemployment rate in U.S. data since 1929. Second, it compares a new model of the economy developed in recent papers and books by Farmer, with a classical model and with a textbook Keynesian approach. Third, it provides evidence that fiscal stimulus will not permanently restore full employment. In Farmer 's model, as in the Keynesian model, employment is demand determined. But aggregate demand depends on wealth, not on income.
Roger Farmer UCLA Department of
THE STOCK MARKET CRASH OF 2008 CAUSED THE GREAT RECESSION: THEORY AND EVIDENCE Roger Farmer Working Paper 17479 http://www.nber.org/papers/w17479
NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 October 2011
This paper was prepared as a Plenary Address to the 17th International Conference in Economics and Finance, held at the Federal Reserve Bank of San Francisco, June 29th-July 1st 2011. I would like to thank the Society for Computational Economics and the Federal Reserve Bank of San Francisco for supporting this event and the organizers, Richard Dennis and Kevin Lansing, for inviting me to present my work. I would also like to thank Dmitry Plotnikov of UCLA for his invaluable research assistance. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research. © 2011 by Roger Farmer. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source.
The Stock Market Crash of 2008 Caused the Great Recession: Theory and Evidence Roger Farmer NBER Working Paper No. 17479 October 2011 JEL No. E0,E2 ABSTRACT This paper argues that the stock market crash of 2008, triggered by a collapse in house prices, caused the Great Recession. The paper has three parts. First, it provides evidence of a high correlation between the value of the stock market and the unemployment rate in U.S. data since 1929. Second, it compares a new model of the economy developed in recent papers and books by Farmer, with a classical model and with a textbook Keynesian approach. Third, it provides evidence that fiscal stimulus will not permanently restore full employment. In Farmer 's model, as in the Keynesian model, employment is demand determined. But aggregate demand depends on wealth, not on income.
Roger Farmer UCLA Department of
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