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The Great Recession: A Self-Fulfilling Global Panic

Author

Listed:
  • Eric van Wincoop

    (University of Virginia)

  • Philippe Bacchetta

    (University of Lausanne)

Abstract

While the 2008-2009 financial crisis originated in the United States, we witnessed steep declines in output, consumption and investment of similar magnitude around the globe. This synchronicity is surprising in the context of both existing theory and past business cycle experience. Theory implies that perfect co-movement can only happen when countries are perfectly integrated, in sharp contrast to the observed home bias in goods and financial markets. We develop a two-country model that allows for self-fulfilling business cycle panics and is consistent with high internationl co-movements and the worldwide increase in perceived uncertainty. We show that limited integration of goods and financial markets is sufficient for business cycle panics to be perfectly synchronized across countries. Moreover, a panic is more likely with tight credit, low interest rates, and unresponsive fiscal policy. We argue that the world was particularly vulnerable to such global panics in 2008.

Suggested Citation

  • Eric van Wincoop & Philippe Bacchetta, 2013. "The Great Recession: A Self-Fulfilling Global Panic," 2013 Meeting Papers 413, Society for Economic Dynamics.
  • Handle: RePEc:red:sed013:413
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    References listed on IDEAS

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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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    Cited by:

    1. repec:bis:bisbps:95 is not listed on IDEAS
    2. Luca Fornaro & Gianluca Benigno, 2015. "Stagnation Traps," 2015 Meeting Papers 810, Society for Economic Dynamics.
    3. Fabrizio Perri & Jonathan Heathcote, 2011. "Wealth and Volatility," 2011 Meeting Papers 1065, Society for Economic Dynamics.
    4. Enders, Zeno & Peter, Alexandra, 2015. "Global Banking, Trade, and the International Transmission of the Great Recession," Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 113022, Verein für Socialpolitik / German Economic Association.
    5. Benhabib, Jess & Liu, Xuewen & Wang, Pengfei, 2016. "Sentiments, financial markets, and macroeconomic fluctuations," Journal of Financial Economics, Elsevier, vol. 120(2), pages 420-443.
    6. Nam, Deokwoo & Wang, Jian, 2015. "The effects of surprise and anticipated technology changes on international relative prices and trade," Journal of International Economics, Elsevier, vol. 97(1), pages 162-177.
    7. repec:vls:rojfme:v:4:y:2017:i:1:p:217-227 is not listed on IDEAS
    8. Matthieu Bussière & Claude Lopez & Cédric Tille, 2015. "Do real exchange rate appreciations matter for growth?," Economic Policy, CEPR;CES;MSH, vol. 30(81), pages 5-45.
    9. Lathaporn Ratanavararak, 2018. "The Impact of Imperfect Financial Integration and Trade on Macroeconomic Volatility and Welfare in Emerging Markets," PIER Discussion Papers 79, Puey Ungphakorn Institute for Economic Research, revised Jan 2018.
    10. Caporale, Guglielmo Maria & Donadelli, Michael & Varani, Alessia, 2015. "International capital markets structure, preferences and puzzles: A “US–China World”," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 36(C), pages 85-99.
    11. Paul Luk & David Vines, 2014. "Debt Deleveraging and the Zero Bound: Potentially Perverse Effects of Real Exchange Rate Movements," Working Papers 202014, Hong Kong Institute for Monetary Research.
    12. Bank for International Settlements, 2014. "EME banking systems and regional financial integration," CGFS Papers, Bank for International Settlements, number 51.

    More about this item

    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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