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International Disaster Risk, Business Cycles, and Exchange Rates

Author

Listed:
  • Adrien Verdelhan

    (MIT Sloan)

  • Francois Gourio

    (Boston University)

Abstract

What accounts for the unprecedented decline in world trade during the crisis? What have been the consequences of shifting risk appetites for international capital flows? How have they differed across developed and developing economies? We answer these questions in an international real business cycle model with time-varying disaster risk. We interpret the recent crisis as an increase in the probability of disasters. It leads to a decrease of investment and a recession worldwide. In our model, capital pulls out of the riskier country, which experience the largest recession. Hence, the real exchange rate depreciates. Both stock markets tank, and short-term safe interest rates fall.

Suggested Citation

  • Adrien Verdelhan & Francois Gourio, 2010. "International Disaster Risk, Business Cycles, and Exchange Rates," 2010 Meeting Papers 435, Society for Economic Dynamics.
  • Handle: RePEc:red:sed010:435
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    File URL: https://economicdynamics.org/meetpapers/2010/paper_435.pdf
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    Cited by:

    1. Laurens CHERCHYE & Ian CRAWFORD & Bram DE ROCK & Frederic VERMEULEN, 2011. "Aggregation without the aggravation? Nonparametric analysis of the representative consumer," Working Papers of Department of Economics, Leuven ces11.36, KU Leuven, Faculty of Economics and Business (FEB), Department of Economics, Leuven.

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