The Great Recession: A Self-Fulfilling Global Panic

Philippe Bacchetta and Eric van Wincoop

No 92013, Working Papers from Hong Kong Institute for Monetary Research

Abstract: While the 2008-2009 financial crisis originated in the United States, we witnessed steep declines in output, consumption and investment of similar magnitudes around the globe. This raises two questions. First, given the observed strong home bias in goods and financial markets, what can account for the remarkable global business cycle synchronicity during this period? Second, what can explain the difference relative to previous recessions, where we witnessed far weaker co-movement? To address these questions, we develop a two-country model that allows for self-fulfilling business cycle panics. We show that a business cycle panic will necessarily be synchronized across countries as long as there is a minimum level of economic integration. Moreover, we show that several factors generated particular vulnerability to such a global panic in 2008: tight credit, the zero lower bound, unresponsive fiscal policy and increased economic integration.

Pages: 53 pages
Date: 2013-06
New Economics Papers: this item is included in nep-dge, nep-mac and nep-opm
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Citations: View citations in EconPapers (23)

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Related works:
Journal Article: The Great Recession: A Self-Fulfilling Global Panic (2016)
Working Paper: The Great Recession: A Self-Fulfilling Global Panic (2013)
Working Paper: The Great Recession: A Self-Fulfilling Global Panic (2013)
Working Paper: The Great Recession: A Self-Fulfilling Global Panic (2013)
Working Paper: The Great Recession: A Self-Fulfilling Global Panic (2013)
Working Paper: The Great Recession: A Self-Fulfilling Global Panic (2013)
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