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Modelling the global financial crisis

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  • Warwick J. McKibbin
  • Andrew Stoeckel

Abstract

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. Copyright 2009, Oxford University Press.

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  • Warwick J. McKibbin & Andrew Stoeckel, 2009. "Modelling the global financial crisis," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 25(4), pages 581-607, Winter.
    • Handle: RePEc:oup:oxford:v:25:y:2009:i:4:p:581-607
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    File URL: http://hdl.handle.net/10.1093/oxrep/grq012
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    1. McKibbin, Warwick J. & Stoeckel, Andrew, 2009. "The potential impact of the global financial crisis on world trade," Policy Research Working Paper Series 5134, The World Bank.
    2. McKibbin, Warwick J & Vines, David, 2000. "Modelling Reality: The Need for Both Inter-temporal Optimization and Stickiness in Models for Policy-Making," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 16(4), pages 106-137, Winter.
    3. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, April.
    4. Henderson, Dale W. & McKibbin, Warwick J., 1993. "A comparison of some basic monetary policy regimes for open economies: implications of different degrees of instrument adjustment and wage persistence," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 221-317, December.
    5. McKibbin, Warwick J. & Wilcoxen, Peter J., 1998. "The theoretical and empirical structure of the G-Cubed model," Economic Modelling, Elsevier, vol. 16(1), pages 123-148, January.
    6. McKibbin, Warwick J. & Pearce, David & Stegman, Alison, 2007. "Long term projections of carbon emissions," International Journal of Forecasting, Elsevier, vol. 23(4), pages 637-653.
    7. Olivier Jean Blanchard & Stanley Fischer, 1989. "Lectures on Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262022834, April.
    8. John B. Taylor, 2009. "The Financial Crisis and the Policy Responses: An Empirical Analysis of What Went Wrong," NBER Working Papers 14631, National Bureau of Economic Research, Inc.
    9. Warwick J. McKibbin & Andrew Stoeckel, 2010. "The Global Financial Crisis: Causes and Consequences," Asian Economic Papers, MIT Press, vol. 9(1), pages 54-86, Winter/Sp.
    10. McKibbin, Warwick J. & Chanthapun, Waranya Pim, 2009. "Exchange Rate Regimes in the Asia-Pacific Region and the Global Financial Crisis," Working Papers on Regional Economic Integration 36, Asian Development Bank.
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    Cited by:

    1. Pantaleo, Innocent M. & Ngasamiaku, Wilhelm M., 2021. "Are Sectors Hit Equally by Covid – 19 Pandemic? Some Insights from Assessing the Economic Impacts of the Pandemic on Selected Sectors in Tanzania," African Journal of Economic Review, African Journal of Economic Review, vol. 9(3), June.
    2. Tony McDonald & Steven Morling, 2011. "The Australian economy and the global downturn, Part 1: Reasons for resilience," Economic Roundup, The Treasury, Australian Government, issue 2, pages 1-31, September.
    3. Roshen Fernando, 2020. "Global impact of loss of confidence in Asian emerging markets," The World Economy, Wiley Blackwell, vol. 43(7), pages 1907-1927, July.
    4. Steve Keen, 2013. "Predicting the ‘Global Financial Crisis’: Post-Keynesian Macroeconomics," The Economic Record, The Economic Society of Australia, vol. 89(285), pages 228-254, June.
    5. Trinh, Cong Tam & Nguyen, Xuan & Sgro, Pasquale & Pham, Cong S., 2020. "Culture, financial crisis and the demand for property, accident and health insurance in the OECD countries," Economic Modelling, Elsevier, vol. 93(C), pages 480-498.
    6. Masahiro Kawai & Fan Zhai, 2010. "Asia’s Post-Global Financial Crisis Adjustment : A Model-Based Dynamic Scenario Analysis," Finance Working Papers 23055, East Asian Bureau of Economic Research.
    7. Joseph F. Francois & Julia Wörz, 2010. "Trade, Economic Structure and the Great Recession: The Example of Central, Eastern and Southeastern Europe," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 1, pages 67-72.
    8. Gunther Tichy, 2020. "Zur Prognostizierbarkeit von Krisen," WIFO Monatsberichte (monthly reports), WIFO, vol. 93(3), pages 193-206, March.
    9. Joseph F. Francois & Julia Wörz, 2011. "Shifts in International Trade and Value Added from 1995 to 2007: Insights into the Drivers of Growth," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 3, pages 37-56.
    10. Warwick J. McKibbin & Andrew Stoeckel, 2010. "The Global Financial Crisis: Causes and Consequences," Asian Economic Papers, MIT Press, vol. 9(1), pages 54-86, Winter/Sp.
    11. Warwick J McKibbin & Andrew Stoeckel, 2018. "Modelling a complex world: improving macro-models," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 34(1-2), pages 329-347.
    12. Seymore, R. & Mabugu, M. & Van Heerden, J.H., 2011. "The welfare effects of Reversed Border Tax Adjustments as a remedy under unilateral environmental taxation: A South African case study," Conference papers 332167, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    13. Chuluunbayar, Delgerjargal, 2019. "Crises in Some Emerging Economy and Its Contagion Effect," MPRA Paper 98810, University Library of Munich, Germany.
    14. Lemelin, André & Robichaud, Véronique & Decaluwé, Bernard, 2013. "Endogenous current account balances in a world CGE model with international financial assets," Economic Modelling, Elsevier, vol. 32(C), pages 146-160.
    15. Mansur, Alfan, 2016. "The Impact of a Loss of Confidence in Emerging Market Economies to the World Economy: A Simulation with the G-Cubed Model," MPRA Paper 93870, University Library of Munich, Germany, revised 10 Nov 2017.

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