Working Paper: NBER ID: w19391
Authors: Roger Farmer
Abstract: This paper studies the connection between the stock market and the unemployment rate. I establish three facts. First, the log of the real value of the S&P 500 and the log of a logistic transformation of the unemployment rate are non-stationary cointegrated series. Second, the stock market Granger causes the unemployment rate. Third, the connection between changes in the real value of the stock market and changes in the unemployment rate has remained structurally stable over seventy years. My results establish that the fall in the stock market in the autumn of 2008 provides a plausible causal explanation for the magnitude of the Great Recession.
Keywords: Stock Market; Unemployment; Great Recession
JEL Codes: E24; E27; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Stock Market (G10) | Unemployment Rate (implications for economic policy) (E24) |
| Stock Market Crash (G01) | Recession (one to four quarters later) (E32) |
| Stock Market (G10) | Unemployment Rate (J64) |
| Stock Market (G10) | Unemployment Rate (one quarter later) (J64) |