Working Paper: NBER ID: w22230
Authors: Robert E. Hall
Abstract: In modern economies, sharp increases in unemployment from major adverse shocks result in long periods of abnormal unemployment and low output. This chapter investigates the processes that account for these persistent slumps. The data are from the economy of the United States, and the discussion emphasizes the financial crisis of 2008 and the ensuing slump. The framework starts by discerning driving forces set in motion by the initial shock. These are higher discounts applied by decision makers (possibly related to a loss of confidence), withdrawal of potential workers from the labor market, diminished productivity growth, higher markups in product markets, and spending declines resulting from tighter lending standards at financial institutions. The next step is to study how driving forces influence general equilibrium, both at the time of the initial shock and later as its effects persist. Some of the effects propagate the effects of the shock---they contribute to poor performance even after the driving force itself has subsided. Depletion of the capital stock is the most important of these propagation mechanisms. I use a medium-frequency dynamic equilibrium model to gain some notions of the magnitudes of responses and propagation.
Keywords: macroeconomics; persistent slumps; financial crisis; unemployment; output
JEL Codes: E24; E32; J21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| sharp increases in unemployment (J64) | prolonged periods of abnormal unemployment (J64) |
| sharp increases in unemployment (J64) | low output (E23) |
| higher discount rates (E43) | prolonged periods of abnormal unemployment (J64) |
| higher discount rates (E43) | low output (E23) |
| withdrawal of potential workers (J63) | prolonged periods of abnormal unemployment (J64) |
| withdrawal of potential workers (J63) | low output (E23) |
| diminished productivity growth (O49) | prolonged periods of abnormal unemployment (J64) |
| diminished productivity growth (O49) | low output (E23) |
| higher markups in product markets (D43) | prolonged periods of abnormal unemployment (J64) |
| higher markups in product markets (D43) | low output (E23) |
| declines in spending due to tighter lending standards (G21) | prolonged periods of abnormal unemployment (J64) |
| declines in spending due to tighter lending standards (G21) | low output (E23) |
| higher discount rates (E43) | depletion of the capital stock (E22) |
| diminished productivity growth (O49) | depletion of the capital stock (E22) |
| higher markups in product markets (D43) | depletion of the capital stock (E22) |