James Stock and Mark Watson on the Great Recession

Binyamin Applebaum summarizes their new paper:

The paper, entitled “Disentangling the Channels of the 2007-2009 Recession,” will be posted on the general conference Web site Thursday afternoon.

The authors argue that the slow pace of recovery reflects a long-term deterioration in economic prospects. Specifically, they estimate that the trend growth rate of gross domestic product fell by 1.2 percentage points between 1965 and 2005.

…the key reason for the faltering pace of growth is that the work force is expanding more slowly. Population growth has slowed, and so has the pace at which women are entering the labor market.

“These demographic changes imply continued low or even declining trend growth rates in employment, which in turn imply that future recessions will be deeper, and will have slower recoveries, than historically has been the case.”

Indeed, recent growth has actually outpaced their expectations.

“The current recovery in employment is actually faster than predicted,” they write. “The puzzle, if there is one, is why the recovery was as strong as it has been.”

This general theory about the power of women has been propounded before, notably by the economist Tyler Cowen in his recent book “The Great Stagnation.”

The paper itself can be found here (pdf). By the way, for market monetarists, equity markets seem to agree.  Stock and Watson, of course, are two of the most technically accomplished macroeconometricians.  This is further evidence — perhaps the most thorough empirical paper on the topic to date — that the Great Recession has been about the interaction of cyclical and structural forces.

Other interesting papers from that symposium are here, including a DeLong-Summers defense of stimulus as possibly self-financing.


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