Spillovers of Domestic Shocks: Will They Counteract the ‘Great Moderation’?

Alina Carare () and Ashoka Mody

International Finance, 2012, vol. 15, issue 1, 69-97

Abstract: The protracted decline in output volatility – the Great Moderation – began to reach its limits by the mid-1990s, and volatility even showed a mild rise in some countries. Domestic shocks did not typically rise but we find that they did spread more rapidly across borders. One reason for the faster transmission of domestic shocks was the increased fragmentation of production across multiple global locations that increasingly included the more volatile emerging markets. Although this development was generally benign, it had latent implications for triggering spikes in volatility since domestic stresses could rapidly spillover across borders. The cascading effects of such spillovers were vividly demonstrated by the trade collapse during the Great Recession of 2008–09.

Date: 2012
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