Working Paper: NBER ID: w18094
Authors: James H. Stock; Mark W. Watson
Abstract: This paper examines the macroeconomic dynamics of the 2007-09 recession in the United States and the subsequent slow recovery. Using a dynamic factor model with 200 variables, we reach three main conclusions. First, although many of the events of the 2007-2009 collapse were unprecedented, their net effect was to produce macro shocks that were larger versions of shocks previously experienced, to which the economy responded in an historically predictable way. Second, the shocks that produced the recession primarily were associated with financial disruptions and heightened uncertainty, although oil shocks played a role in the initial slowdown and subsequent drag was added by effectively tight conventional monetary policy arising from the zero lower bound. Third, while the slow nature of the recovery is partly due to the shocks of this recession, most of the slow recovery in employment, and nearly all of the slow recovery in output, is due to a secular slowdown in trend labor force growth.
Keywords: recession; macroeconomic dynamics; financial disruptions; uncertainty; dynamic factor model
JEL Codes: E24; E32; E37; E44
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| financial disruptions (F65) | heightened uncertainty (D89) |
| heightened uncertainty (D89) | recession (E32) |
| oil price shocks (Q43) | recession (E32) |
| financial shocks (F65) | recession (E32) |
| demographic changes (J11) | long-term slowdown in trend labor force growth (J21) |
| long-term slowdown in trend labor force growth (J21) | slow recovery in employment and output (E69) |