The Great Recession: A Self-Fulfilling Global Panic

Philippe Bacchetta and Eric van Wincoop

No 19062, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: E32 F40 F41 F44 (search for similar items in EconPapers)
Date: 2013-05
New Economics Papers: this item is included in nep-mac and nep-opm
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Published as Philippe Bacchetta & Eric van Wincoop, 2016. "The Great Recession: A Self-Fulfilling Global Panic," American Economic Journal: Macroeconomics, American Economic Association, vol. 8(4), pages 177-198, October.

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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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