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Risk shocks and divergence between the Euro area and the US in the aftermath of the Great Recession

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  • Brand, Thomas
  • Tripier, Fabien

Abstract

Highly synchronized during the Great Recession of 2008-2009, the Euro area and the US have diverged in the period that followed. To explain this divergence, we provide a structural interpretation of these episodes through the estimation for both economies of a business cycle model with financial frictions and risk shocks, measured as the volatility of idiosyncratic uncertainty in the financial sector. Our results show that risk shocks have stimulated US growth in the aftermath of the Great Recession and have been the main driver of the double-dip recession in the Euro area. They play a positive role in the Euro area only after 2015. Risk shocks therefore seem well suited to account for the consequences of the sovereign debt crisis in Europe and the subsequent positive effects of unconventional monetary policies, notably the ECB's Asset Purchase Programme (APP).

Suggested Citation

  • Brand, Thomas & Tripier, Fabien, 2021. "Risk shocks and divergence between the Euro area and the US in the aftermath of the Great Recession," CEPREMAP Working Papers (Docweb) 2101, CEPREMAP.
  • Handle: RePEc:cpm:docweb:2101
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    1. Risk shocks and divergence between the Euro area and the US in the aftermath of the Great Recession
      by Christian Zimmermann in NEP-DGE blog on 2021-03-22 18:49:17

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    More about this item

    Keywords

    Great Recession; Business cycles; Uncertainty; Divergence; Risk Shocks;
    All these keywords.

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • G3 - Financial Economics - - Corporate Finance and Governance

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