The Long Slump

Robert E. Hall

NBER Working Paper No. 16741
Issued in January 2011
NBER Program(s):   EFG

In a market-clearing economy, declines in demand from one sector do not cause large declines in aggregatge output because other sectors expand. The key price mediating the response is the interest rate. A decline in the rate stimulates all categories of spending. But in a low-inflation economy, the room for a decline in the rate is small, because of the notorious lower limit of zero on the nominal interest rate. In the Great Depression, substantial deflation caused the real interest rate to reach high levels. In the Great Slump that began at the end of 2007, low inflation resulted in an only slightly negative real rate when full employment called for a much lower real rate because of declines in demand. Fortunately the inflation rate hardly responded to conditions in product and labor markets, else deflation might have occurred, with an even higher real interest rate. I concentrate on three closely related sources of declines in demand: the buildup of excess stocks of housing and consumer durables, the corresponding expansion of consumer debt that financed the buildup, and financial frictions that resulted from the decline in real-estate prices.

download in pdf format
   (1317 K)

email paper

This paper is available as PDF (1317 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w16741

Published: Robert E. Hall, 2011. "The Long Slump," American Economic Review, American Economic Association, vol. 101(2), pages 431-69, April. citation courtesy of

Users who downloaded this paper also downloaded these:
Uhlig w16416 Economics and Reality
Schmitt-Grohe and Uribe w16514 Liquidity Traps: An Interest-Rate-Based Exit Strategy
Teles and Uhlig w16393 Is Quantity Theory Still Alive?
Curdia and Woodford w16208 The Central-Bank Balance Sheet as an Instrument of Monetary Policy
McCallum w17005 Should Central Banks Raise their Inflation Targets? Some Relevant Issues
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us