Do Stock Investors Cushion the Impact of a Recession?

In the above graph, the upper line shows what happened to real GDP during the 2001 recession. It was a very brief, mild recession. Perhaps one of the reasons why it was so mild was because stock owners took their time selling off their stocks. 18 months elapsed between the peak of the business cycle and the minimum stock price as measured by the S&P 500.

I estimated a dynamic macroeconomic model in four variable: GDP, interest rates, investment, and stock prices. Then I estimated what would happen if stock investors immediately sold off their stocks as soon as the recession began. The lower line shows what the model estimates would have happened to GDP. The recession would have been six times worse than it actually was.

Anyone who is interested may see the paper here.