The Great Recession: A Self-Fulfilling Global Panic

Philippe Bacchetta and Eric van Wincoop

Cahiers de Recherches Economiques du Département d'économie from Université de Lausanne, Faculté des HEC, Département d’économie

Abstract: While the 2008-2009 financial 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 financial 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-fulfilling 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 fiscal 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: 45 pp. + figures (total 60 pp.)
Date: 2013-05
New Economics Papers: this item is included in nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (23)

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http://www.hec.unil.ch/deep/textes/13.05.pdf (application/pdf)

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:lau:crdeep:13.05

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