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International Recessions

  • Fabrizio Perri

    (University of Minnesota and Federal Reserve Bank of Minneapolis (email: fperri@umn.edu))

  • Vincenzo Quadrini

    (University of Southern California)

The 2008-2009 crisis was characterized by an unprecedented degree of international synchronization as all major industrialized countries experienced large macroeconomic contractions. Countries also experienced large and synchronized contractions in the growth of financial flows. In this paper we present a two-country model with financial markets frictions where credit-driven recessions can explain these features of the recent crisis. A credit contraction can emerge as a self-fulfilling equilibrium caused by pessimistic but fully rational expectations. As a result of the credit contraction, in a financially integrated world, countries experience large and, endogenously synchronized, declines in asset prices and economic activity ( international recessions).

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File URL: http://www.imes.boj.or.jp/research/papers/english/11-E-26.pdf
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Paper provided by Institute for Monetary and Economic Studies, Bank of Japan in its series IMES Discussion Paper Series with number 11-E-26.

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Date of creation: Sep 2011
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Handle: RePEc:ime:imedps:11-e-26
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