Working Paper: NBER ID: w17201
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-fulling 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: International Recessions; Credit Market Frictions; Macroeconomic Synchronization
JEL Codes: E3; F4; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| credit tightening (E51) | declines in asset prices (G19) |
| credit tightening (E51) | declines in economic activity (F44) |
| tightening of credit constraints (E51) | synchronized declines in asset prices (E32) |
| tightening of credit constraints (E51) | synchronized declines in economic activity (F44) |
| exogenous tightening of credit constraints (E51) | affects employment (J68) |
| exogenous tightening of credit constraints (E51) | affects economic activity (F69) |
| credit shocks after long periods of credit expansion (F65) | exacerbates depth of crisis (H12) |
| credit shocks (G21) | elucidate GDP dynamics (E20) |
| credit shocks (G21) | elucidate employment dynamics (J29) |
| self-fulfilling equilibria in credit markets (D53) | international synchronization of recessions (F44) |