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

Alexandra Born and Zeno Enders

No 6912, CESifo Working Paper Series from CESifo Group Munich

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 channel 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 data, the model predicts the trade channel to be twice as important for the transmission of the crisis than the financial channel. In the UK, the latter dominates due to higher foreign-asset holdings, which, at the same time, 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 enforcement of bank capital requirements would have deepened the initial slump while simultaneously speeding up the recovery. The effects of higher capital requirements depend on the way banks’ balance sheets adjust to this intervention.

Keywords: financial crisis; international transmission; international business cycles; global banks (search for similar items in EconPapers)
JEL-codes: F44 F41 E32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-dge, nep-int, nep-mac and nep-opm
Date: 2018
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Working Paper: Global Banking, Trade, and the International Transmission of the Great Recession (2015) Downloads
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