The Great Recession: US Dynamics and Spillovers to the World Economy
Posted: 18 Dec 2010 Last revised: 9 Jun 2013
Date Written: November 16, 2010
Abstract
The paper aims at assessing the mechanics of the Great Recession, considering both its domestic propagation within the US, as well as its spillovers to advanced and emerging economies. A total of 50 countries has been investigated by means of a large-scale open economy macroeconometric model, providing an accurate assessment of the international macro/finance interface over the whole 1980-2009 period. It is found that a boom-bust credit cycle interpretation of the crisis is consistent with the empirical evidence. Moreover, concerning the real effects of the crisis within the US, stronger evidence of an asset prices channel, rather than a liquidity channel, has been detected. The results also support the effectiveness of the expansionary fiscal/monetary policy mix implemented by the Fed and the US government. Concerning the spillovers to the world economy, it is found that while the financial shock has spilled over to foreign countries through US housing and stock price dynamics, as well as excess liquidity creation, the trade channel likely is the key transmission mechanism of the real shock.
Keywords: Great Recession, financial crisis, economic crisis, boom-bust, credit cycle, international business cycle, factor vector autoregressive models
JEL Classification: C22, E32, F36
Suggested Citation: Suggested Citation
Università degli Studi di Milano-Bicocca - Department of Economics, Management and Statistics (DEMS) ( email )
Piazza dell'Ateneo Nuovo, 1
Milan, 20126
Italy