The Great Recession: A Self-Fulfilling Global Panic

Abstract

While the 2008–2009 financial crisis originated in the United States, output, consumption, and investment declined by similar magnitudes around the globe. Given the partial integration of both goods and financial markets, what can account for the remarkable global business cycle synchronicity during this period? To address this question, we develop a two-country model allowing 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. Several factors, including tight credit, made the global economy particularly vulnerable to a global panic in 2008. (JEL E12, E32, E44, E58, F44, G01)