Modelling the Global Financial Crisis

Posted: 3 May 2010

See all articles by Warwick J. McKibbin

Warwick J. McKibbin

Australian National University

Andrew Stoeckel

Australian National University (ANU)

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.

Keywords: global financial crisis, international trade, DSGE models

JEL Classification: E27, E44, E47, E63

Suggested Citation

McKibbin, Warwick J. and Stoeckel, Andrew, Modelling the Global Financial Crisis. Oxford Review of Economic Policy, Vol. 25, No. 4, pp. 581-607, 2009, Available at SSRN: https://ssrn.com/abstract=1599065 or http://dx.doi.org/grq012

Warwick J. McKibbin

Australian National University ( email )

Crawfrod School of Public Policy
Canberra, ACT 2600
Australia
02-61250301 (Phone)
02-62735575 (Fax)

HOME PAGE: http://www.sensiblepolicy.com

Andrew Stoeckel (Contact Author)

Australian National University (ANU) ( email )

Canberra, Australian Capital Territory 2601
Australia

Do you have negative results from your research you’d like to share?

Paper statistics

Abstract Views
777
PlumX Metrics