DP9630 The Stock Market Crash Really Did Cause the Great Recession

Author(s): Roger E A Farmer
Publication Date: September 2013
Keyword(s): stock market, unemployment
JEL(s): E24, E27, E32
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=9630

This note shows that a big stock market crash, in the absence of central bank intervention, will be followed by a major recession one to four quarters later. I establish this fact by studying the forecasting ability of three models of the unemployment rate. I show that the connection between changes in the stock market and changes in the unemployment rate has remained structurally stable for seventy years. My findings demonstrate that the stock market contains significant information about future unemployment.