Thursday, August 20, 2015

It Ain't Over Till it's Over: A Global Perspective on the Great Moderation-Great Recession Interconnection

FABIO C. BAGLIANO, University of Turin - Department of Economics and Statistics, Center for Research on Pensions and Welfare Policies (CeRP), Collegio Carlo Alberto
Università di Milano Bicocca, University of Milan, Bicocca - Department of Economics, Quantitative Methods and Business Strategies (DEMS), Center for Economic Research on Pensions and Welfare Policies (CeRP)
A large-scale model of the global economy is used to investigate the structural determinants of the Great Moderation and the transition to the Great Recession (1986-2010). Beside the global economy perspective, the model presents the novel feature of a broad range of included financial variables and risk factors measures. The results point to the relevance of various mechanisms related to the global monetary policy stance (Great Deviation), financial institutions' risk taking behavior (Great Leveraging) and global imbalances, in shaping aggregate fluctuations. The paper finally contributes to the literature on early warning indicators, assessing the information content of risk factor innovations for the prediction of the timing and depth of the Great Recession.