McKibbin, Warwick J.Stoeckel, Andrew2012-03-192012-03-192009-11-01https://hdl.handle.net/10986/4326This 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 a global economic model. The model has six sectors of production and trade in 15 major economies and regions. The paper shows that the shocks observed in financial markets can be used to generate the severe economic contraction in global trade and production experienced in 2009. In particular the distinction between the production and trade of durable and non durable goods plays a key role in explaining the much larger contraction in trade than GDP experienced by most economies. The paper explores the implications of the large increase in fiscal deficits and the implications of a global trade war in response to the financial crisis.CC BY 3.0 IGOACCOUNTINGADVANCED ECONOMIESADVERSE EFFECTAGGREGATE SUPPLYAGRICULTUREAMOUNT OF CAPITALARBITRAGEASSET PRICEASSET PRICESASSET VALUATIONBAILOUTSBALANCE SHEETSBANK BORROWINGBANK GOVERNORSBANK LENDINGBANK OPERATIONSBANKING SYSTEMSBANKRUPTCYBASIS POINTSBENCHMARKBOND SPREADSBOND YIELDSBONDSBUDGET CONSTRAINTCAPITAL ACCUMULATIONCAPITAL FLOWCAPITAL FLOWSCAPITAL RAISINGCAPITAL STOCKCARBON EMISSIONSCASH TRANSFERSCENTRAL BANKCENTRAL BANK GOVERNORSCENTRAL BANKSCOMMODITYCOMMODITY PRICECOMMODITY PRICESCONSUMER LOANSCONSUMERSCORPORATE BONDSCORPORATE TAXCOST OF CAPITALCURRENT ACCOUNT BALANCESCURRENT ACCOUNT DEFICITSCURRENT ACCOUNT SURPLUSESDEBTDEFAULTSDEFLATIONDEPOSITSDEVELOPING COUNTRIESDEVELOPING COUNTRYDEVELOPING ECONOMIESDIRECT PAYMENTSDISCOUNT RATESDISPOSABLE INCOMEDOMESTIC BANKSDOMESTIC ECONOMYDRIVERSDURABLEDURABLE GOODDURABLE GOODSDURABLESECONOMIC GROWTHECONOMIC OUTLOOKECONOMIC RECOVERYELASTICITYEQUILIBRIUMEQUITIESEQUITY PRICESEXCHANGE RATEEXPANSIONARY FISCAL POLICYEXPECTED RETURNSEXPENDITUREEXPORTSFAIR VALUEFEDERAL RESERVEFINANCIAL ASSETSFINANCIAL CAPITALFINANCIAL CRISISFINANCIAL FLOWSFINANCIAL INSTITUTIONSFINANCIAL MARKETSFINANCIAL REGULATIONFINANCIAL RISKFINANCIAL SECTORFINANCIAL SHOCKFINANCIAL STABILITYFISCAL CONSOLIDATIONFISCAL DEFICITFISCAL DEFICITSFISCAL POLICYFORECASTSFOREIGN BANKFOREIGN CAPITALFOREIGN EXCHANGEFREE BONDFUTURE EARNINGSFUTURE LABORGDPGDP PER CAPITAGENERAL EQUILIBRIUMGLOBAL CAPITALGLOBAL CAPITAL FLOWSGLOBAL ECONOMYGLOBAL TRADEGOVERNMENT BONDSGOVERNMENT BORROWINGGOVERNMENT DEBTGOVERNMENT DEFICITSGOVERNMENT INVESTMENTGOVERNMENT SPENDINGGROWTH RATEGROWTH RATESHOLDINGHOUSEHOLD INCOMEHOUSEHOLD WEALTHHOUSINGHOUSING FINANCEINCOMEINCOME EFFECTINCOME ELASTICITYINCOME TAXINCOMESINDUSTRIAL ECONOMIESINFLATIONINFLATION RATEINFRASTRUCTURE INVESTMENTINFRASTRUCTURE PROJECTSINSTRUMENTINSURANCEINTERNATIONAL BANKINTERNATIONAL ECONOMICSINTERNATIONAL INVESTORSINTERNATIONAL TRADEINVENTORIESINVENTORYINVESTINGINVESTMENT DECISIONINVESTMENT DECISIONSINVESTMENT INCOMELABOR MARKETLAWSLDCSLEGISLATIONLENDERSLEVEL OF INTEREST RATESLIQUIDITYLOANLOCAL GOVERNMENTSLOSS OF CONFIDENCELOW INTEREST RATESMACROECONOMIC ANALYSISMACROECONOMICSMARGINAL PRODUCTMARKET VALUATIONMARKET VALUEMARKET VALUESMINIMUM WAGEMONETARY AUTHORITIESMONETARY POLICYMORTGAGEMORTGAGE MARKETMORTGAGE MARKETSNET EXPORTSNOMINAL INTEREST RATENOMINAL INTEREST RATESOPEN ECONOMIESOPTIMIZATIONOUTPUT GAPPARTICULAR COUNTRYPENSIONPENSION FUNDSPERSONAL INCOMEPOLICY RESPONSEPOLICY RESPONSESPOSITIVE EFFECTSPOTENTIAL OUTPUTPRICE CHANGESPRIVATE INVESTMENTPRODUCTION FUNCTIONPRODUCTIVITYPRODUCTIVITY GROWTHPROTECTIONISMPUBLIC POLICYPUBLIC SPENDINGRAPID GROWTHRATE OF RETURNRATE OF RETURN TO CAPITALRATES OF INTERESTRATES OF RETURNREAL EXCHANGE RATEREAL EXCHANGE RATESREAL GDPREAL INTERESTREAL INTEREST RATEREAL INTEREST RATESRECESSIONREGULATORY OVERSIGHTRESERVESRISK PREMIUMRISK PREMIUMSRURAL INFRASTRUCTURESAVINGSSEWAGESHORT TERM INTEREST RATESSMALL INVESTORSSOFT LOANSSTOCK MARKETSTOCK MARKETSSTOCKSTAXTAX BREAKSTAX EXEMPTIONTAX RATESTAX STRUCTURESTELECOMMUNICATIONSTRADE BALANCETRADE BALANCESTRADE CREDITTRADE FINANCETRADE FLOWSTRADE POLICYTRADE PROTECTIONTRADESTREASURIESTREASURYTREASURY BONDTREASURY BOND YIELDTRUSTEESUNDERWRITERSUNEMPLOYMENTWAGE RIGIDITYWEALTHWEALTH EFFECTSWORLD ECONOMIESWORLD ECONOMYWORLD FINANCIAL MARKETSWORLD TRADEWTOWorld Bank10.1596/1813-9450-5134