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Risk shocks and divergence between the Euro area and the US

Thomas Brand () and Fabien Tripier ()

Working Papers from CEPII research center

Abstract: Why have the Euro area and the US diverged since 2011 while they were highly synchronized during the recession of 2008-2009? To explain this divergence, we provide a structural interpretation of these episodes through the estimation of a business cycle model with financial frictions for both economies. Our results show that risk shocks, measured as the volatility of idiosyncratic uncertainty in the financial sector, have played a crucial role in the divergence with the absence of risk reversal in the Euro area. Risk shocks have stimulated US credit and investment growth since the trough of 2009 whereas they have been at the origin of the double-dip recession in the Euro area. A companion website is available at http://visualdata.cepii.fr/risk-shocks-and-divergence.

Keywords: Great recession; Business cycles; Uncertainty; Divergence; Risk Shocks (search for similar items in EconPapers)
JEL-codes: E3 E4 G3 (search for similar items in EconPapers)
Date: 2014-07
New Economics Papers: this item is included in nep-ban, nep-dge, nep-eec, nep-ger, nep-mac, nep-opm and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:cii:cepidt:2014-11

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