Shocks and Crashes
Three shocks, distinguished by whether their effects are permanent or transitory, are identified to characterize the post-war dynamics of aggregate consumer spending, labor earnings, and household wealth. The first shock accounts for virtually all of the variation in consumption; we argue that it can be plausibly interpreted as a permanent total factor productivity shock. The second shock, which underlies the vast bulk of quarterly fluctuations in labor income growth, permanently reallocates rewards between shareholders and workers but leaves consumption unaffected. Over the last 25 years, the cumulative effect of this shock has persistently boosted stock market wealth and persistently lowered labor earnings. We call this a factors share shock. The third shock is a persistent but transitory innovation that accounts for the vast majority of quarterly fluctuations in asset values but has a negligible impact on consumption and labor earnings at all horizons. We call this an exogenous risk aversion shock. We show that the 2000-02 asset market crash and recession surrounding it was characterized by a negative transitory wealth (positive risk aversion) shock, predominantly affecting stock market wealth. By contrast, the 2007-09 crash and recession was characterized by a string of large negative productivity shocks, as well as positive risk aversion shocks.
|Date of creation:||Apr 2011|
|Publication status:||published as Shocks and Crashes , Martin Lettau, Sydney C. Ludvigson. in NBER Macroeconomics Annual 2013, Volume 28 , Parker and Woodford. 2014|
|Note:||AP EFG ME|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
Web page: http://www.nber.org
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Gonzalo, Jesús & Ng, Serena, 1996.
"A systematic framework for analyzing the dynamic effects of permanent and transitory shocks,"
DES - Working Papers. Statistics and Econometrics. WS
6203, Universidad Carlos III de Madrid. Departamento de Estadística.
- Gonzalo, Jesus & Ng, Serena, 2001. "A systematic framework for analyzing the dynamic effects of permanent and transitory shocks," Journal of Economic Dynamics and Control, Elsevier, vol. 25(10), pages 1527-1546, October.
- Gonzalo, J. & Ng, S., 1996. "A Systematic Framework for Analyzing the Dynamic Effects of Permanent and Transitory Shocks," Cahiers de recherche 9603, Universite de Montreal, Departement de sciences economiques.
- Gonzalo, J. & Ng, S., 1996. "A Systematic Framework for Analyzing the Dynamic Effects of Permanent and Transitory Shocks," Cahiers de recherche 9603, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
- Martin Lettau & Sydney C. Ludvigson & Jessica A. Wachter, 2004.
"The Declining Equity Premium: What Role Does Macroeconomic Risk Play?,"
NBER Working Papers
10270, National Bureau of Economic Research, Inc.
- Martin Lettau & Sydney Ludvigson & Jessica A. Wachter, 2005. "The declining equity premium: what role does macroeconomic risk play?," Proceedings, Board of Governors of the Federal Reserve System (U.S.).
- Martin Lettau & Sydney C. Ludvigson & Jessica A. Wachter, 2008. "The Declining Equity Premium: What Role Does Macroeconomic Risk Play?," Review of Financial Studies, Society for Financial Studies, vol. 21(4), pages 1653-1687, July.
- Lettau, Martin & Ludvigson, Sydney & Wachter, Jessica, 2006. "The Declining Equity Premium: What Role Does Macroeconomic Risk Play?," CEPR Discussion Papers 5519, C.E.P.R. Discussion Papers.
- Martin Lettau & Sydney C. Ludvigson, 2004. "The Declining Equity Premium: What Role Does Macroeconomic Risk Play?," 2004 Meeting Papers 644, Society for Economic Dynamics.
- Ogaki, M. & Park, Y.Y., 1989.
"A Cointegration Approach To Estimating Preference Parameters,"
RCER Working Papers
209, University of Rochester - Center for Economic Research (RCER).
- Ogaki, Masao & Park, Joon Y., 1997. "A cointegration approach to estimating preference parameters," Journal of Econometrics, Elsevier, vol. 82(1), pages 107-134.
- Flavin, Marjorie A, 1981. "The Adjustment of Consumption to Changing Expectations about Future Income," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 974-1009, October.
- Hanno Lustig & Stijn Van Nieuwerburgh, 2008.
"The Returns on Human Capital: Good News on Wall Street is Bad News on Main Street,"
Review of Financial Studies,
Society for Financial Studies, vol. 21(5), pages 2097-2137, September.
- Hanno Lustig & Stijn Van Nieuwerburgh, 2005. "The Returns on Human Capital: Good News on Wall Street is Bad News on Main Street," NBER Working Papers 11564, National Bureau of Economic Research, Inc.
- Pástor, Luboš & Veronesi, Pietro, 2004.
"Was There A Nasdaq Bubble in the Late 1990s?,"
CEPR Discussion Papers
4485, C.E.P.R. Discussion Papers.
- Kydland, Finn E & Prescott, Edward C, 1982.
"Time to Build and Aggregate Fluctuations,"
Econometric Society, vol. 50(6), pages 1345-1370, November.
- Finn E. Kydland & Edward C. Prescott, 1982. "Web interface for "Time to Build and Aggregate Fluctuations"," QM&RBC Codes 4a, Quantitative Macroeconomics & Real Business Cycles.
- Finn E. Kydland & Edward C. Prescott, 1982. "Executable program for "Time to Build and Aggregate Fluctuations"," QM&RBC Codes 4, Quantitative Macroeconomics & Real Business Cycles.
- Alan S. Blinder & Angus Deaton, 1985. "The Time Series Consumption Function Revisited," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 16(2), pages 465-521.
- Ríos-Rull, José-Víctor & Santaeulàlia-Llopis, Raül, 2010. "Redistributive shocks and productivity shocks," Journal of Monetary Economics, Elsevier, vol. 57(8), pages 931-948, November.
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:16996. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.