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The housing bubble, the credit crunch, and the Great Recession: A reply to Paul Krugman

The housing bubble, the credit crunch, and the Great Recession: A reply to Paul Krugman

In a recent post, Paul Krugman gave his take on the causes of the Great Recession. His inclination, contrary to my findings, is to emphasize the effects of the housing bust on aggregate demand rather than the financial panic as the source of the downturn. In a follow-up response to my paper, Krugman asks for evidence on the transmission mechanism. Specifically, if the financial disruption was the major cause of the recession, how were its effects reflected in the major components of GDP, such as consumption and investment? In this post I’ll offer a few thoughts on Paul’s questions.

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