Working Paper: NBER ID: w14446
Authors: Casey Mulligan; Luke Threinen
Abstract: We model the panic of 2008 as part of the wealth and substitution effects deriving from a housing price crash that began in 2006. The dissipation of the wealth effect stimulates a reorganization of the banking industry and increases in employment, GDP, and unemployment. The release of resources from the housing sector lowers investment goods prices, and thereby devalues existing non-residential capital while stimulating non-residential investment. These predictions are compared with measured U.S. economic performance from 2006 to 2008 Q2.
Keywords: Housing Price Crash; Economic Models; Market Fundamentals; Banking Sector; GDP; Consumption; Investment
JEL Codes: E20; E32; R21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Decline in housing prices (R31) | Decrease in household wealth (G51) |
| Decrease in household wealth (G51) | Reduced consumption (E21) |
| Reduced consumption (E21) | Increase in GDP (E20) |
| Decrease in household wealth (G51) | Increase in labor supply (J20) |
| Increase in labor supply (J20) | Increase in unemployment (J64) |
| Resources released from housing sector (R31) | Lower investment goods prices (E22) |
| Lower investment goods prices (E22) | Stimulate non-residential investment (E22) |
| Resources released from housing sector (R31) | Devalue existing non-residential capital (E22) |
| Adverse wealth effect from housing crash (G59) | Reorganization of the banking industry (G28) |
| Adverse wealth effect from housing crash (G59) | Increase in employment (J23) |
| Adverse wealth effect from housing crash (G59) | Increase in GDP (E20) |