Citation

Discussion Paper Details

Please find the details for DP9487 in an easy to copy and paste format below:

Full Details   |   Bibliographic Reference

Full Details

Title: The Great Recession: A Self-Fulfilling Global Panic

Author(s): Philippe Bacchetta and Eric van Wincoop

Publication Date: May 2013

Keyword(s): Contagion, Great Recession and International co-movements

Programme Area(s): International Macroeconomics

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.

For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=9487

Bibliographic Reference

Bacchetta, P and van Wincoop, E. 2013. 'The Great Recession: A Self-Fulfilling Global Panic'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=9487