Working Paper: CEPR ID: DP8483
Authors: Fabrizio Perri; Vincenzo Quadrini
Abstract: The 2008-2009 crisis was characterized by an unprecedented degree of international synchronization as all major industrialized countries experienced large macroeconomic contractions around the date of Lehman bankruptcy. At the same time countries also experienced large and synchronized tightening of credit conditions. We present a two-country model with financial market frictions where a credit tightening can emerge as a self-fulfilling equilibrium caused by pessimistic but fully rational expectations. As a result of the credit tightening, countries experience large and endogenously synchronized declines in asset prices and economic activity (international recessions). The model suggests that these recessions are more severe if they happen after a prolonged period of credit expansion.
Keywords: Credit tightness; International crisis
JEL Codes: E32; F3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Tighter credit constraints (E51) | Declines in asset prices (G19) |
| Tighter credit constraints (E51) | Declines in economic activity (E32) |
| Credit tightening (E51) | Economic activity in both countries (F69) |
| Ordinary credit shocks (E39) | Extraordinary recessions (F44) |
| Endogenous credit shocks (E51) | Comovement in real activity and financial intermediation (E44) |
| Changes in structural features (F12) | Altered volatility and international correlation of shocks (F41) |