Robert Hall, Stanford University and NBER

Macroeconomics of Persistent Slumps

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 agency frictions in capital markets resulting in tighter lending standards, higher discounts applied by decision makers (possibly related to a loss of confidence), withdrawal of potential workers from the labor market, and diminished productivity growth. Most of the driving forces are less persistent than unemployment and output. 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 one of the most important of these propagation mechanisms. Another is the borrowing power of households. Hall uses a medium-frequency dynamic equilibrium model to gain some notion of the magnitudes of responses and propagation.