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

34 Pages Posted: 1 Nov 2011

See all articles by Roger E. A. Farmer

Roger E. A. Farmer

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

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Date Written: October 2011

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

JEL Classification: E2, E3, E6

Suggested Citation

Farmer, Roger E.A., The Stock Market Crash of 2008 Caused the Great Recession: Theory and Evidence (October 2011). CEPR Discussion Paper No. DP8617, Available at SSRN: https://ssrn.com/abstract=1952480

Roger E.A. Farmer (Contact Author)

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