NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Disentangling the Channels of the 2007-2009 Recession

James H. Stock, Mark W. Watson

NBER Working Paper No. 18094
Issued in May 2012
NBER Program(s):   EFG   ME

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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This paper was revised on July 3, 2012

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Document Object Identifier (DOI): 10.3386/w18094

Published: Disentangling the Channels of the 2007-2009 Recession (with James Stock), Brookings Papers on Economic Activity, Spring 2012, 81-135.

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