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Global Banking, Trade, and the International Transmission of the Great Recession

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  • Alexandra Born
  • Zeno Enders

Abstract

The global financial crisis of 2007-2009 spread through different channels from its origin in the United States to large parts of the world. In this paper we explore the financial and the trade channel in a unified framework and quantify their relative importance for this transmission. Specifically, we employ a DSGE model of an open economy with an internationally operating banking sector. We investigate the transmission of the crisis via the collapse of export demand and through losses in the value of cross-border asset holdings. Calibrated to German data, the model predicts the trade channel to be twice as important for the transmission of the crisis than the financial channel. In the UK, the latter dominates due to higher foreign-asset holdings, which, at the same time, serve as an automatic stabilizer in case of plummeting foreign demand. The transmission via the financial channel triggers a much longer-lasting recession relative to the trade channel, resulting in larger cumulated output losses and a prolonged crisis particularly in the UK. Stricter enforcement of bank capital requirements would have deepened the initial slump while simultaneously speeding up the recovery. The effects of higher capital requirements depend on the way banks’ balance sheets adjust to this intervention.

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  • Alexandra Born & Zeno Enders, 2018. "Global Banking, Trade, and the International Transmission of the Great Recession," CESifo Working Paper Series 6912, CESifo.
  • Handle: RePEc:ces:ceswps:_6912
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    1. Global Banking, Trade, and the International Transmission of the Great Recession
      by Christian Zimmermann in NEP-DGE blog on 2016-02-22 15:23:10

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    Cited by:

    1. Stumpner, Sebastian, 2019. "Trade and the geographic spread of the great recession," Journal of International Economics, Elsevier, vol. 119(C), pages 169-180.
    2. Cardani, Roberta & Hohberger, Stefan & Pfeiffer, Philipp & Vogel, Lukas, 2022. "Domestic versus foreign drivers of trade (im)balances: How robust is evidence from estimated DSGE models?," Journal of International Money and Finance, Elsevier, vol. 121(C).
    3. Lorenz Emter, 2020. "Leverage Cycles, Growth Shocks, and Sudden Stops in Capital Inflows," Trinity Economics Papers tep1120, Trinity College Dublin, Department of Economics.
    4. Ben Zeev, Nadav, 2019. "Global credit supply shocks and exchange rate regimes," Journal of International Economics, Elsevier, vol. 116(C), pages 1-32.
    5. Fabian J. Baier & Paul J. J. Welfens, 2019. "The UK’s banking FDI flows and Total British FDI: a dynamic BREXIT analysis," International Economics and Economic Policy, Springer, vol. 16(1), pages 193-213, March.
    6. Timo Bettendorf, 2017. "Idiosyncratic and international transmission of shocks in the G7: Does EMU matter?," Review of International Economics, Wiley Blackwell, vol. 25(4), pages 856-890, September.

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    More about this item

    Keywords

    financial crisis; international transmission; international business cycles; global banks;
    All these keywords.

    JEL classification:

    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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