The Great Recession: Divide between Integrated and Less Integrated Countries&ast

Guillermo Hausmann-Guil, Eric van Wincoop and Gang Zhang ()
Authors registered in the RePEc Author Service: Guillermo Hausmann Guil

IMF Economic Review, 2016, vol. 64, issue 1, 134-176

Abstract: No robust relationship has been found between the decline in growth of countries during the Great Recession and their level of trade or financial integration. We confirm the absence of such a monotonic relationship, but document instead a strong discontinuous relationship. Countries whose level of economic integration (trade and finance) was above a certain cutoff saw a much larger drop in growth than less integrated countries, a finding that is robust to a wide variety of controls. The paper argues that standard models based on transmission of exogenous shocks across countries cannot explain these facts. Instead it explains the evidence in the context of a multicountry model with business cycle panics that are endogenously coordinated across countries.

Date: 2016
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