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Disentangling the Channels of the 2007-2009 Recession

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  • James H. Stock
  • Mark W. Watson

Abstract

This paper examines the macroeconomic dynamics of the 2007-09 recession in the United States and the subsequent slow recovery. Using a dynamic factor model with 200 variables, we reach three main conclusions. First, although many of the events of the 2007-2009 collapse were unprecedented, their net effect was to produce macro shocks that were larger versions of shocks previously experienced, to which the economy responded in an historically predictable way. Second, the shocks that produced the recession primarily were associated with financial disruptions and heightened uncertainty, although oil shocks played a role in the initial slowdown and subsequent drag was added by effectively tight conventional monetary policy arising from the zero lower bound. Third, while the slow nature of the recovery is partly due to the shocks of this recession, most of the slow recovery in employment, and nearly all of the slow recovery in output, is due to a secular slowdown in trend labor force growth.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18094.

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Date of creation: May 2012
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Publication status: published as Disentangling the Channels of the 2007-2009 Recession (with James Stock), Brookings Papers on Economic Activity, Spring 2012, 81-135.
Handle: RePEc:nbr:nberwo:18094

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Cited by:
  1. Gilhooly, Robert & Weale, Martin & Wieladek, Tomasz, 2012. "Disaggregating the international business cycle," Discussion Papers, Monetary Policy Committee Unit, Bank of England 37, Monetary Policy Committee Unit, Bank of England.
  2. Helmut Lütkepohl, 2014. "Structural Vector Autoregressive Analysis in a Data Rich Environment: A Survey," SFB 649 Discussion Papers SFB649DP2014-004, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  3. Yves S. Schüler, 2014. "Asymmetric Effects of Uncertainty over the Business Cycle: A Quantile Structural Vector Autoregressive Approach," Working Paper Series of the Department of Economics, University of Konstanz, Department of Economics, University of Konstanz 2014-02, Department of Economics, University of Konstanz.
  4. Zhu, Xiaoneng & Zhu, Jie, 2013. "Predicting stock returns: A regime-switching combination approach and economic links," Journal of Banking & Finance, Elsevier, Elsevier, vol. 37(11), pages 4120-4133.
  5. Canova, Fabio & Ciccarelli, Matteo, 2013. "Panel vector autoregressive models: a survey," Working Paper Series, European Central Bank 1507, European Central Bank.
  6. Michael D. Bordo & Joseph G. Haubrich, 2012. "Deep recessions, fast recoveries, and financial crises: evidence from the American record," Working Paper 1214, Federal Reserve Bank of Cleveland.
  7. Gertler, Mark & Karadi, Peter, 2014. "Monetary Policy Surprises, Credit Costs and Economic Activity," CEPR Discussion Papers, C.E.P.R. Discussion Papers 9824, C.E.P.R. Discussion Papers.
  8. Albinowski, Maciej & Ciżkowicz, Piotr & Rzońca, Andrzej, 2013. "Distrust in the ECB – product of failed crisis prevention or of inappropriate cure?," MPRA Paper 48242, University Library of Munich, Germany.

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