Modeling the Financial Crisis with the Global, Econometric E3MG Model

: Recent developments in global finance and the world economy have demonstrated some of the shortcomings in the widely-applied equilibrium-based modeling approach. In this paper, the global E3MG model (www.e3mgmodel.com) has been applied to assess the impacts of the crisis that began in 2008 with the so-called credit crunch. E3MG is a sectoral input-output model (including the banking sector), based on the system of national accounts. The model includes 20 global regions and uses annual time series data. E3MG s parameters are estimated using error-correction methodology, making it an almost unique tool in being able to assess short-term sectoral impacts, as well as long-term trends. Using E3MG, an analysis of the crisis and current (January, 2009) policy measures has been build up through a series of carefully-defined scenarios, simulating aspects of behavioral changes within the banking sector and in the wider global economy. The results help to explain the mechanisms through which the real economy has been impacted by the crisis and give an indication of the effectiveness of current policy. Finally, the paper considers the effects of policy measures designed to restore confidence in the global financial system that are coordinated at the global level, following the seven-point plan outlined in Barker (2009).