The global financial crisis: Causes and consequences

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; and finds that the shocks observed in financial markets can generate in the in the G-Cubed model (an intertemporal global model) the severe economic contraction in global trade and production currently being experienced in 2009. Our investigation shows that 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; and that the future of the global economy depends critically on whether the shocks to risk are expected to be permanent or temporary.