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The Great Recession: A Self-Fulfilling Global Panic

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  • Bacchetta, Philippe
  • van Wincoop, Eric

Abstract

While the 2008-2009 financial crisis originated in the United States, we witnessed steep declines in output, consumption and investment of similar magnitudes around the globe. This raises two questions. First, given the observed strong home bias in goods and financial markets, what can account for the remarkable global business cycle synchronicity during this period? Second, what can explain the difference relative to previous recessions, where we witnessed far weaker co-movement? To address these questions, we develop a two-country model that allows for self-fulfilling business cycle panics. We show that a business cycle panic will necessarily be synchronized across countries as long as there is a minimum level of economic integration. Moreover, we show that several factors generated particular vulnerability to such a global panic in 2008: tight credit, the zero lower bound, unresponsive fiscal policy and increased economic integration.

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  • Bacchetta, Philippe & van Wincoop, Eric, 2013. "The Great Recession: A Self-Fulfilling Global Panic," CEPR Discussion Papers 9487, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:9487
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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Why did the panic of 2008 spread abroad?
      by Economic Logician in Economic Logic on 2013-12-09 21:31:00

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    More about this item

    Keywords

    Contagion; Great recession; International co-movements;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles

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