Université de Lausanne
Faculté des
HEC
Département d'économétrie
et d'économie politique
Cahier de recherches économiques du DEEP No. 13.05
Philippe Bacchetta and Eric van Wincoop
The Great Recession: A Self-Fulfilling Global Panic
May 2013
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.
Keywords: Great Recession; international co-movements; contagion
JEL classification: F40; F41; F44; E32