The Stock Market Crash Really Did Cause the Great Recession
17 Pages Posted: 8 Sep 2015
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The Stock Market Crash Really Did Cause the Great Recession
The Stock Market Crash Really Did Cause the Great Recession
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.
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