Global Banking, Trade, and the International Transmission of the Great Recession

Zeno Enders and Alexandra Peter

VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy from Verein für Socialpolitik / German Economic Association

Abstract: The global financial crisis of 2007-2009 spread through different channels from its origin in the United States to large parts of the world. In this paper we explore the financial and the trade channels in a unified framework and quantify their relative importance for this transmission. Specifically, we employ a DSGE model of an open economy with an internationally operating banking sector. We investigate the transmission of the crisis via the collapse of export demand and through losses in the value of cross-border asset holdings. Calibrated to German and UK data, the model attributes around half of the observed maximum output decline in Germany to these channels, and 87% for the UK. While the trade channel explains 30% of the empirical output decline in both countries, the financial channel plays a much larger role in the UK than in Germany. The UK's larger vulnerability to financial shocks is due to higher foreign-asset holdings, which simultaneously serve as an automatic stabilizer in case of plummeting foreign demand. The transmission via the financial channel triggers a much longer-lasting recession relative to the trade channel, resulting in larger cumulated output losses and a prolonged crisis particularly in the UK. Stricter bank capital regulations would have deepened the initial slump while simultaneously speeding up the recovery.

JEL-codes: E32 F41 F44 (search for similar items in EconPapers)
Date: 2015
New Economics Papers: this item is included in nep-dge, nep-int, nep-mac and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Global Banking, Trade, and the International Transmission of the Great Recession (2019)
Working Paper: Global Banking, Trade, and the International Transmission of the Great Recession (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:vfsc15:113022

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