Working Paper: CEPR ID: DP8617
Authors: Roger E. A. Farmer
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.
Keywords: stock market; unemployment
JEL Codes: E2; E3; E6
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Stock market crash of 2008 (G01) | Great Recession (G01) |
| Collapse in house prices (R31) | Stock market crash of 2008 (G01) |
| Stock market values (G10) | Unemployment rates (J64) |
| Housing wealth (G51) | Stock market values (G10) |
| Aggregate demand is wealth-dependent (E21) | Unemployment rates (J64) |