Annotations

Disentangling the channels of the 2007-2009 recession

Stock, James H.; Watson, Mark W.

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Three questions addressed by this paper:
1. How did the recession differ from post-war recessions?
2. What were the economic shocks that triggered the recession and what their quantitative contribution
to the fall in economic output?
3. To what extent does the current jobless growth constitute a puzzle?

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1. The shocks are that drove the recession are not new but, rather, are large movement in the 'Old
Factors'
2. Other unique events around the past recessions i.e. 'unprecedented failures' and novel responses
like the TARP did not have qualitatively different net effects on the macroeconomy than did past
disturbances
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On jobless Growth
The Author compared average of recoveries between 1960 and 1982 with recovery following 2009Q2:
- Less than half is attributable to cyclical factors (i.e. shocks/ factors during the recession)
- Most attributable to long-term slowdown in trend employment growth. Trend annual employment
growth slowed from 2.4% in 1960 to 0.9% in 2005. This broad trend decline in employment can be
explained, the author argued, by
- Changes in the Underlying Demographic Factors. Fundamentally:
+ flatening of the female labor force participation rate
+ aging of the workforce

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The comovement in the observed series emanates from the factors.
It is not neccessary to model directly the dynamics of the observed series/ variables
This avoid the proliferation of coefficients

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My understanding of this point is because there are several series of the observed variables i.e. up to
200 sometimes, using VAR directly will results in 'proliferation of coefficients'. However, because DFM
uses a few factor to represent the several variables and series, it can achieve a tractable (manageable)
and internally consistent framework

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No top-level macroeconomic aggregates (including GDP, consump-tion, investment, total employment,

and the total unemployment rate) were
used to estimate the factors.

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