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Market Responses to the Panic of 2008

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  • Casey Mulligan
  • Luke Threinen

Abstract

We model the panic of 2008 as part of the wealth and substitution effects deriving from a housing price crash that began in 2006. The dissipation of the wealth effect stimulates a reorganization of the banking industry and increases in employment, GDP, and unemployment. The release of resources from the housing sector lowers investment goods prices, and thereby devalues existing non-residential capital while stimulating non-residential investment. These predictions are compared with measured U.S. economic performance from 2006 to 2008 Q2.

Suggested Citation

  • Casey Mulligan & Luke Threinen, 2008. "Market Responses to the Panic of 2008," NBER Working Papers 14446, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:14446
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    1. John P. Harding & Xiaozhing Liang & Stephen L. Ross, 2007. "The Optimal Capital Structure of Banks: Balancing Deposit Insurance, Capital Requirements and Tax-Advantaged Debt," Working papers 2007-29, University of Connecticut, Department of Economics, revised Feb 2008.
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    4. James M. Poterba, 1984. "Tax Subsidies to Owner-Occupied Housing: An Asset-Market Approach," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 99(4), pages 729-752.
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    6. Merton, Robert C. & Bodie, Zvi, 1993. "Deposit insurance reform: a functional approach," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 38(1), pages 1-34, June.
    7. Casey B. Mulligan, 1998. "Pecuniary Incentives to Work in the United States during World War II," Journal of Political Economy, University of Chicago Press, vol. 106(5), pages 1033-1077, October.
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    Cited by:

    1. Buiter, Willem H., 2010. "Housing wealth isn't wealth," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 4, pages 1-29.
    2. Casey B. Mulligan, 2010. "The Housing Cycle and Prospects for Technical Progress," NBER Working Papers 15971, National Bureau of Economic Research, Inc.
    3. Mulligan Casey B, 2011. "Simple Analytics and Empirics of the Government Spending Multiplier and Other "Keynesian" Paradoxes," The B.E. Journal of Macroeconomics, De Gruyter, vol. 11(1), pages 1-47, June.
    4. Miron, Jeffrey A., 2009. "Bailout or Bankruptcy?," Scholarly Articles 11380185, Harvard University Department of Economics.
    5. Casey B. Mulligan, 2008. "A Depressing Scenario: Mortgage Debt Becomes Unemployment Insurance," NBER Working Papers 14514, National Bureau of Economic Research, Inc.
    6. Miron, Jeffrey A., 2009. "Bailout or Bankruptcy? A Libertarian Perspective on the Financial Crisis," Scholarly Articles 4319665, Harvard University Department of Economics.
    7. Mulligan, Casey B., 2011. "Simple Analytics and Empirics of the Government Spending Multiplier and Other "Keynesian" Paradoxes," Working Papers 240, The University of Chicago Booth School of Business, George J. Stigler Center for the Study of the Economy and the State.
    8. Iana Liadze & Ray Barrell & Professor E. Philip Davis, 2010. "Calibrating macroprudential policy," National Institute of Economic and Social Research (NIESR) Discussion Papers 354, National Institute of Economic and Social Research.
    9. Casey B. Mulligan & Luke Threinen, 2010. "The Marginal Products of Residential and Non-Residential Capital Through 2009," NBER Working Papers 15897, National Bureau of Economic Research, Inc.

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    More about this item

    JEL classification:

    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand

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