The Great Recession: US dynamics and spillovers to the world economy

• Published in: Journal of banking & finance Vol. 36; no. 1; pp. 1 - 13
• Main Authors: Bagliano, Fabio C., Morana, Claudio
• Format: Journal Article
• Language: English
• Published: Amsterdam Elsevier B.V 2012; Elsevier Sequoia S.A
• Subjects: Asset pricing; Boom-bust; Business cycles; C22; Credit cycle; E32; Economic crisis; Economic models; F36; Factor vector autoregressive models; Financial crisis; Global economy; Great Recession; International business cycle; International finance; Liquidity; Macroeconomics; Recessions; Spillovers; Studies; Trade; U.S.A; United States > US; Credit cycle; C22; E32; Boom-bust; F36; Great Recession; International business cycle; Factor vector autoregressive models; Financial crisis; Economic crisis
• ISSN: 0378-4266; 1872-6372
• DOI: 10.1016/j.jbankfin.2011.06.002

► We investigate the macro-finance interface during the “Great Recession”. ► We consider measures of excess liquidity and financial fragility. ► We find international transmission of US financial shocks through house and stock price dynamics and liquidity. ► The real effects of financial shocks are transmitted internationally through asset price and trade channels. This paper provides an empirical investigation of both the within-US and international channels of transmission of macroeconomic and financial shocks by means of a 50-country macroeconometric model (estimated over the 1980–2009 period), including measures of excess liquidity and financial fragility, specifically designed in order to evaluate the relevance of the boom-bust credit cycle view put forward as an interpretation of the recent “Great Recession” episode. We find that such a view is consistent with the empirical evidence. Moreover, concerning the real effects of financial shocks within the US, we detect stronger evidence of an asset prices channel, rather than a liquidity channel. Concerning the spillovers to the world economy, we find that while financial disturbances are transmitted to foreign countries through US house and stock price dynamics, as well as excess liquidity creation, the trade channel is the key trasmission mechanism of real shocks.