NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Great Recession: A Self-Fulfilling Global Panic

Philippe Bacchetta, Eric van Wincoop

NBER Working Paper No. 19062
Issued in May 2013
NBER Program(s):   EFG   IFM

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.

download in pdf format
   (690 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w19062

Users who downloaded this paper also downloaded these:
Mendoza and Smith w19072 Financial Globalization, Financial Crises, and the External Portfolio Structure of Emerging Markets
Christiano, Eichenbaum, and Trabandt w20040 Understanding the Great Recession
Aizenman and Noy w19067 Public and Private Saving and the Long Shadow of Macroeconomic Shocks
Alvaredo, Atkinson, Piketty, and Saez w19075 The Top 1 Percent in International and Historical Perspective
Bordo and James w19112 The European Crisis in the Context of the History of Previous Financial Crises
 
Publications
Activities
Meetings
NBER Videos
Themes
Data
People
About

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us