Working Paper: CEPR ID: DP8688
Authors: Tamim Bayoumi; Trung Bui
Abstract: The financial crisis that struck the global economy in late 2008 had its origins in excesses in the US housing market. Its reverberations, however, were felt around the world and nowhere more keenly than in Western Europe. While North Atlantic trade links were in relative stasis, the North Atlantic furnished a uniquely close relationship across financial institutions, as a combination of dominant US financial markets, European competition policy, and differences in financial regulation made the European banking system heavily dependent on dollar wholesale funding. Empirical estimates and macroeconomic model simulations indicate that growth spillovers predominantly flow westwards across the North Atlantic. The bellwether nature of US financial markets creates uniquely large spillovers to the rest of the world even in normal times, and these spillovers are only enhanced if disruptions to bank wholesale funding markets are added -- as occurred during the recent global crisis.
Keywords: economic crisis; financial deregulation; financial integration; north atlantic economy
JEL Codes: E02; F34; N00; N10
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| US real GDP shock (N12) | Euro area real GDP increase (O52) |
| US real GDP shock (N12) | UK real GDP increase (N14) |
| Euro area real GDP (O52) | US real GDP (N12) |
| Financial relationships (L14) | growth spillovers (F62) |
| Disruptions in bank wholesale funding markets (F65) | growth spillovers (F62) |