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The Stock Market Crash of 2008 Caused the Great Recession

Author

Listed:
  • Roger Farmer

    (University of California Los Angeles)

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.

Suggested Citation

  • Roger Farmer, 2012. "The Stock Market Crash of 2008 Caused the Great Recession," 2012 Meeting Papers 145, Society for Economic Dynamics.
    • Handle: RePEc:red:sed012:145
    as

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    File URL: https://red-files-public.s3.amazonaws.com/meetpapers/2012/paper_145.pdf
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    References listed on IDEAS

    as
    1. Beyer, Andreas & Farmer, Roger E. A., 2003. "Identifying the monetary transmission mechanism using structural breaks," Working Paper Series 275, European Central Bank.
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    4. Martin Lettau & Sydney C. Ludvigson, 2004. "Understanding Trend and Cycle in Asset Values: Reevaluating the Wealth Effect on Consumption," American Economic Review, American Economic Association, vol. 94(1), pages 276-299, March.
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    11. Martin Lettau & Sydney C. Ludvigson, 2014. "Shocks and Crashes," NBER Macroeconomics Annual, University of Chicago Press, vol. 28(1), pages 293-354.
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    18. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
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