International recessions

One key feature of the 2008-2009 crisis has been its international dimension, as most countries have experienced large synchronous contractions. The recent crisis has also been characterized by a sharp fall in employment but not in productivity. These two characterizing features of the recent recession are not present in many of the previous contractions. We develop an explicit model of financial frictions to show that these changes are consistent with the view that `credit shocks' have been playing a more prominent role as a source of business cycle fluctuations in an environment with international mobility of capital.