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The Great Recession: US dynamics and spillovers to the world economy

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  • Fabio C. Bagliano

    ()

  • Claudio Morana

    ()

Abstract

The paper aims at assessing the mechanics of the Great Recession, considering both its domestic propagation within the US, as well as its spillovers to advanced and emerging economies. A total of 50 countries has been investigated by means of a large-scale open economy macroeconometric model, providing an accurate assessment of the international macro/finance interface over the whole 1980-2009 period. It is found that a boom-bust credit cycle interpretation of the crisis is consistent with the empirical evidence. Moreover, concerning the real effects of the crisis within the US, stronger evidence of an asset prices channel, rather than a liquidity channel, has been detected. The results also support the effectiveness of the expansionary fiscal/monetary policy mix implemented by the Fed and the US government. Concerning the spillovers to the world economy, it is found that while the financial shock has spilled over to foreign countries through US housing and stock price dynamics, as well as excess liquidity creation, the trade channel likely is the key trasmission mechanism of the real shock.

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Bibliographic Info

Paper provided by ICER - International Centre for Economic Research in its series ICER Working Papers - Applied Mathematics Series with number 34-2010.

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Length: 46 pages
Date of creation: Dec 2010
Date of revision:
Handle: RePEc:icr:wpmath:34-2010

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Keywords: Great Recession; financial crisis; economic crisis; boombust; credit cycle; international business cycle; factor vector autoregressive models;

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