Global Banking, Trade, and the International Transmission of the Great Recession

49 Pages Posted: 7 May 2018

See all articles by Alexandra Born

Alexandra Born

European Central Bank (ECB)

Zeno Enders

University of Heidelberg

Date Written: March 05, 2018

Abstract

The global financial crisis of 2007-2009 spread through different channels from its origin in the United States to large parts of the world. In this paper we explore the financial and the trade channel in a unified framework and quantify their relative importance for this transmission. Specifically, we employ a DSGE model of an open economy with an internationally operating banking sector. We investigate the transmission of the crisis via the collapse of export demand and through losses in the value of cross-border asset holdings. Calibrated to German data, the model predicts the trade channel to be twice as important for the transmission of the crisis than the financial channel. In the UK, the latter dominates due to higher foreign-asset holdings, which, at the same time, serve as an automatic stabilizer in case of plummeting foreign demand. The transmission via the financial channel triggers a much longer-lasting recession relative to the trade channel, resulting in larger cumulated output losses and a prolonged crisis particularly in the UK. Stricter enforcement of bank capital requirements would have deepened the initial slump while simultaneously speeding up the recovery. The effects of higher capital requirements depend on the way banks’ balance sheets adjust to this intervention.

Keywords: financial crisis, international transmission, international business cycles, global banks

JEL Classification: F440, F410, E320

Suggested Citation

Born, Alexandra and Enders, Zeno, Global Banking, Trade, and the International Transmission of the Great Recession (March 05, 2018). CESifo Working Paper Series No. 6912. Available at SSRN: https://ssrn.com/abstract=3167143

Alexandra Born

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Zeno Enders (Contact Author)

University of Heidelberg ( email )

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