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Apocalypse Then: The Evolution of the North Atlantic Economy and the Global Crisis

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  • Bayoumi, Tamim
  • Bui, Trung

Abstract

The financial crisis that struck the global economy in late 2008 had its origins in excesses in the US housing market. Its reverberations, however, were felt around the world and nowhere more keenly than in Western Europe. While North Atlantic trade links were in relative stasis, the North Atlantic furnished a uniquely close relationship across financial institutions, as a combination of dominant US financial markets, European competition policy, and differences in financial regulation made the European banking system heavily dependent on dollar wholesale funding. Empirical estimates and macroeconomic model simulations indicate that growth spillovers predominantly flow westwards across the North Atlantic. The bellwether nature of US financial markets creates uniquely large spillovers to the rest of the world even in normal times, and these spillovers are only enhanced if disruptions to bank wholesale funding markets are added -- as occurred during the recent global crisis.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 8688.

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Date of creation: Dec 2011
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Handle: RePEc:cpr:ceprdp:8688

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Keywords: economic crisis; financial deregulation; financial integration; North Atlantic economy;

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  1. Christopher J. Neely, 2010. "The large scale asset purchases had large international effects," Working Papers 2010-018, Federal Reserve Bank of St. Louis.
  2. Francis Vitek, 2012. "Policy Analysis and Forecasting in the World Economy," IMF Working Papers 12/149, International Monetary Fund.
  3. Ehrmann, Michael & Fratzscher, Marcel & Rigobon, Roberto, 2005. "Stocks, bonds, money markets and exchange rates: measuring international financial transmission," Working Paper Series 0452, European Central Bank.
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