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Macroeconomics of Persistent Slumps

In: Handbook of Macroeconomics

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  • Hall, R.E.

Abstract

In modern economies, sharp increases in unemployment from major adverse shocks result in long periods of abnormal unemployment and low output. This chapter investigates the processes that account for these persistent slumps. The data are from the economy of the United States, and the discussion emphasizes the financial crisis of 2008 and the ensuing slump. The framework starts by discerning driving forces set in motion by the initial shock. These are higher discounts applied by decision makers (possibly related to a loss of confidence), withdrawal of potential workers from the labor market, diminished productivity growth, higher markups in product markets, and spending declines resulting from tighter lending standards at financial institutions. The next step is to study how driving forces influence general equilibrium, both at the time of the initial shock and later as its effects, persist. Some of the effects propagate the effects of the shock—they contribute to poor performance even after the driving force itself has subsided. Depletion of the capital stock is the most important of these propagation mechanisms. I use a medium-frequency dynamic equilibrium model to gain some notions of the magnitudes of responses and propagation.

Suggested Citation

  • Hall, R.E., 2016. "Macroeconomics of Persistent Slumps," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 2131-2181, Elsevier.
    • Handle: RePEc:eee:macchp:v2-2131
    DOI: 10.1016/bs.hesmac.2016.03.010
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    More about this item

    Keywords

    Financial crisis; Great recession; Slump; Unemployment; Labor-force participation; Stagnation; Sources of economic fluctuations; Economic driving forces; Economic shocks; Confidence; Propagation; E24; E32; G12;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure

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    Access and download statistics

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