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"Fed Policy and the Effects of a Stock Market Crash on the Economy," Business Economics, 2000.

Paper: pdf file

Businesses face the risk at the current time of a stock market crash. Profits will undoubtedly suffer if there is a crash and the economy goes into a recession. This paper shows that unless there has been a huge increase in the long run PE ratio, the current level of stock prices implies an unrealistically large share of profits in GDP in the future. The paper also suggests that the Fed does not have the power to prevent a recession from taking place if there is a crash.


Stock market experiments related to the material in this paper can be done on this site. Go to Stock Price Calculations.