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Modelling the Global Financial Crisis

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  • Warwick J McKibbin

    ()

  • Andy Stoeckel

    ()

Abstract

This paper models the global financial crisis as a combination of shocks to global housing markets and sharp increases in risk premia of firms, households and international investors in an intertemporal (or DSGE) global model. The model has six sectors of production and trade in 15 major economies and regions. The paper shows that a ‘switching’ of expectations about risk premia shocks in financial markets can easily generate the severe economic contraction in global trade and production currently being experienced in 2009 and subsequent events. The results show that the future of the global economy depends critically on whether the shocks to risk are expected to be permanent or temporary. The best representation of the crisis may be one where initial long lasting pessimism about risk is unexpectedly revised to a more moderate scenario. This suggests a rapid recovery in countries not experiencing a balance sheet adjustment problem.

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Bibliographic Info

Paper provided by Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University in its series CAMA Working Papers with number 2009-25.

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Length: 44 pages
Date of creation: Sep 2009
Date of revision:
Handle: RePEc:een:camaaa:2009-25

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  1. McKibbin, Warwick J. & Chanthapun, Waranya Pim, 2009. "Exchange Rate Regimes in the Asia-Pacific Region and the Global Financial Crisis," Working Papers on Regional Economic Integration 36, Asian Development Bank.
  2. McKibbin, W.J. & Wilcoxen, P.J., 1995. "The Theoretical and Empirical Structure of the G-Cubed Model," Papers, Brookings Institution - Working Papers 118, Brookings Institution - Working Papers.
  3. John B. Taylor, 2009. "The Financial Crisis and the Policy Responses: An Empirical Analysis of What Went Wrong," NBER Working Papers 14631, National Bureau of Economic Research, Inc.
  4. McKibbin, Warwick J. & Pearce, David & Stegman, Alison, 2007. "Long term projections of carbon emissions," International Journal of Forecasting, Elsevier, Elsevier, vol. 23(4), pages 637-653.
  5. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, December.
  6. Dale W. Henderson & Warwick J. McKibbin, 1993. "A comparison of some basic monetary policy regimes for open economies: implications of different degrees of instrument adjustment and wage persistence," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 458, Board of Governors of the Federal Reserve System (U.S.).
  7. McKibbin, Warwick J. & Stoeckel, Andrew, 2009. "The potential impact of the global financial crisis on world trade," Policy Research Working Paper Series 5134, The World Bank.
  8. Warwick J. McKibbin & Andrew Stoeckel, 2010. "The Global Financial Crisis: Causes and Consequences," Asian Economic Papers, MIT Press, MIT Press, vol. 9(1), pages 54-86, January.
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Cited by:
  1. Steve Keen, 2011. "Debunking Macroeconomics," Economic Analysis and Policy (EAP), Queensland University of Technology (QUT), School of Economics and Finance, Queensland University of Technology (QUT), School of Economics and Finance, vol. 41(3), pages 147-168, December.
  2. Joseph F. Francois & Julia Wörz, 2011. "Shifts in International Trade and Value Added from 1995 to 2007: Insights into the Drivers of Growth," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), Oesterreichische Nationalbank (Austrian Central Bank), issue 3, pages 37-56.
  3. Lemelin, André & Robichaud, Véronique & Decaluwé, Bernard, 2013. "Endogenous current account balances in a world CGE model with international financial assets," Economic Modelling, Elsevier, vol. 32(C), pages 146-160.
  4. Masahiro Kawai & Fan Zhai, 2010. "Asia’s Post-Global Financial Crisis Adjustment : A Model-Based Dynamic Scenario Analysis," Finance Working Papers 23055, East Asian Bureau of Economic Research.

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