International Recessions

Perri, Fabrizio; Quadrini, Vincenzo

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International Recessions

CEPR Discussion Paper No. DP8483

51 Pages Posted: 20 Jul 2011

See all articles by Fabrizio Perri

Fabrizio Perri

Federal Reserve Banks - Federal Reserve Bank of Minneapolis

Vincenzo Quadrini

University of Southern California - Marshall School of Business - Finance and Business Economics Department; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

There are 2 versions of this paper

Date Written: July 2011

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 Classification: E32, F3

Suggested Citation: Suggested Citation

Perri, Fabrizio and Quadrini, Vincenzo, International Recessions (July 2011). CEPR Discussion Paper No. DP8483, Available at SSRN: https://ssrn.com/abstract=1890006