Journal Article

Modelling the global financial crisis

Warwick J. McKibbin and Andrew Stoeckel

in Oxford Review of Economic Policy

Published on behalf of The Oxford Review of Economic Policy Ltd

Volume 25, issue 4, pages 581-607
Published in print January 2009 | ISSN: 0266-903X
Published online January 2009 | e-ISSN: 1460-2121 | DOI: http://dx.doi.org/10.1093/oxrep/grq012
Modelling the global financial crisis

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This paper models the global financial crisis as a combination of shocks to global housing markets and sharp increases in risk premia of firms, households, and international investors in an intertemporal (dynamic stochastic general equilibrium or DSGE) global model. The model has six sectors of production and trade in 15 major economies and regions. The paper shows that a ‘switching’ of expectations about risk premia shocks in financial markets can easily generate the severe economic contraction in global trade and production currently being experienced in 2009 and subsequent events. The results show that the future of the global economy depends critically on whether the shocks to risk are expected to be permanent or temporary. The best representation of the crisis may be one where initial long-lasting pessimism about risk is unexpectedly revised to a more moderate scenario. This suggests a rapid recovery in countries not experiencing a balance sheet adjustment problem.

Keywords: global financial crisis; international trade; DSGE models; E27; E44; E47; E63

Journal Article.  9786 words.  Illustrated.

Subjects: Economic Development and Growth ; Public Economics ; Political Economy ; Public Policy

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