The Great Recession: A Self-Fulfilling Global Panic

Philippe Bacchetta and Eric van Wincoop
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Eric van Wincoop: University of Virginia - Department of Economics; National Bureau of Economic Research (NBER)

No 13-28, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: While the 2008-2009 fi nancial 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 fi nancial 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-fulfi lling 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 fi scal policy and increased economic integration.

Keywords: Great Recession; International co-movements; Contagion (search for similar items in EconPapers)
JEL-codes: E32 F40 F41 F44 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2013-05
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Citations: View citations in EconPapers (17)

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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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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1328

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