Working Paper: NBER ID: w17479
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: No keywords provided
JEL Codes: E0; E2
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) |
| Stock market fluctuations (E32) | Unemployment rates (J64) |
| Declining house prices (R31) | Stock market crash of 2008 (G01) |
| Stock market wealth (G19) | Aggregate demand (E00) |
| Aggregate demand (E00) | Unemployment rates (J64) |
| Stock market crash (G01) | Decreased consumption (E21) |
| Decreased consumption (E21) | Increased unemployment (J64) |
| Declining stock market wealth (G19) | Reduced consumer confidence (D12) |
| Reduced consumer confidence (D12) | Decreased consumption (E21) |
| Decreased consumption (E21) | Increased layoffs (J63) |
| Increased layoffs (J63) | High unemployment levels (J64) |
| Stock market performance (G10) | Unemployment rates (J64) |