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Risk shocks and divergence between the Euro area and the US

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  • Thomas Brand
  • Fabien Tripier

Abstract

Why have the Euro area and the US diverged since 2011 while they were highly synchronized during the recession of 2008-2009? To explain this divergence, we provide a structural interpretation of these episodes through the estimation of a business cycle model with financial frictions for both economies. Our results show that risk shocks, measured as the volatility of idiosyncratic uncertainty in the financial sector, have played a crucial role in the divergence with the absence of risk reversal in the Euro area. Risk shocks have stimulated US credit and investment growth since the trough of 2009 whereas they have been at the origin of the double-dip recession in the Euro area. A companion website is available at http://visualdata.cepii.fr/risk-shocks-and-divergence.

Suggested Citation

  • Thomas Brand & Fabien Tripier, 2014. "Risk shocks and divergence between the Euro area and the US," Working Papers 2014-11, CEPII research center.
    • Handle: RePEc:cii:cepidt:2014-11
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    References listed on IDEAS

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    More about this item

    Keywords

    Great recession; Business cycles; Uncertainty; Divergence; Risk Shocks;
    All these keywords.

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • G3 - Financial Economics - - Corporate Finance and Governance

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