Global Banks, Fiscal Policy and International Business Cycles

The worldwide financial crisis that erupted in 2007 has revealed the fragility of major financial institutions and it triggered the sharpest global recession since the 1930s. Before the crisis, standard macro theory largely abstracted from financial intermediaries, and macro forecasting models ignored information on bank balance sheets. The dramatic events since 2001 require a rethinking of the role of global finance for real activity, and will represent a challenge for economic research for years to come. This article describes recent research by the author that deals with these issues. That research develops novel theoretical and empirical analyses of the role of global banks for business cycles in the EU and in the world economy. These contributions also highlight the stabilising role of government support to banks, during a financial crisis.