TY - CEPII
A1 - Thomas Brand
A1 - Fabien Tripier
TI - Risk shocks and divergence between the Euro area and the US
IS - 2014-11
T3 - Working Papers
KW - Great recession
KW - Business cycles
KW - Uncertainty
KW - Divergence
KW - Risk Shocks
N2 - Why have the Euro area and the US diverged since 2011 while they were highly synchronized during the recession of 2008-2009? To explain this divergence, we provide a structural interpretation of these episodes through the estimation of a business cycle model with financial frictions for both economies. Our results show that risk shocks, measured as the volatility of idiosyncratic uncertainty in the financial sector, have played a crucial role in the divergence with the absence of risk reversal in the Euro area. Risk shocks have stimulated US credit and investment growth since the trough of 2009 whereas they have been at the origin of the double-dip recession in the Euro area. A companion website is available at http://visualdata.cepii.fr/risk-shocks-and-divergence.
ER -