The Stock Market Crash Really Did Cause the Great Recession

17 Pages Posted: 8 Sep 2015

See all articles by Roger E. A. Farmer

Roger E. A. Farmer

University of California, Los Angeles (UCLA) - Department of Economics; University of Warwick; National Institute of Economic and Social Research (NIESR); National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

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Date Written: October 2015

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.

Suggested Citation

Farmer, Roger E.A., The Stock Market Crash Really Did Cause the Great Recession (October 2015). Oxford Bulletin of Economics and Statistics, Vol. 77, Issue 5, pp. 617-633, 2015. Available at SSRN: https://ssrn.com/abstract=2656479 or http://dx.doi.org/10.1111/obes.12100

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