The Stock Market Crash of 2008 Caused the Great Recession: Theory and Evidence

Roger Farmer

No 8617, CEPR Discussion Papers from Centre for Economic Policy Research

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: stock market; Unemployment (search for similar items in EconPapers)
JEL-codes: E2 E3 E6 (search for similar items in EconPapers)
Date: 2011-10
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (12)

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Related works:
Journal Article: The stock market crash of 2008 caused the Great Recession: Theory and evidence (2012)
Working Paper: The Stock Market Crash of 2008 Caused the Great Recession: Theory and Evidence (2011)
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