The Great Recession: A Self-Fulfilling Global Panic
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.
We gratefully acknowledge financial support from the National Science Foundation (grant SES-0649442), the Bankard Fund for Political Economy, the Hong Kong Institute for Monetary Research, the National Centre of Competence in Research "Financial Valuation and Risk Management" (NCCR FINRISK), and the ERC Advanced Grant #269573. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Philippe Bacchetta & Eric van Wincoop, 2016. "The Great Recession: A Self-Fulfilling Global Panic," American Economic Journal: Macroeconomics, American Economic Association, vol. 8(4), pages 177-198, October. citation courtesy of