Discussion

• Main Author: Kathryn Dominguez
• Other Authors: The Pennsylvania State University CiteSeerX Archives
• Format: Text
• Language: English
• Subjects: North Atlantic
• Online Access: http://citeseerx.ist.psu.edu/viewdoc/summary?doi=10.1.1.411.119; http://www.rba.gov.au/publications/confs/2011/pdf/bayoumi-bui-disc.pdf

This ambitious paper by Bayoumi and Bui seeks to explain how the recent global financial crisis (GFC) spread between the United States and Europe. The paper argues that the culprit is financial market developments in the North Atlantic countries, which led to conditions that allowed a housing crisis in the United States to severely undermine the banking systems in Europe and the United Kingdom. The paper intriguingly argues that causality is unidirectional; a negative shock in the United States moved eastward across the North Atlantic. The paper examines the linkages between the North Atlantic countries from three perspectives: (1) historical data; (2) empirical estimates; and (3) macroeconomic model simulations. The first section of the paper uses a series of heat maps (presented in Appendix A) over time to make the case that it was financial linkages, and not trade linkages, that propagated the crisis. The heat maps allow ocular analysis of the changes in both trade and financial linkages across the globe. The maps show that trade dynamics are within North America and with Asia, but not much has changed between the North Atlantic countries. In contrast, the heat maps show that financial links, measured using cross-holdings of private sector assets and banking ties, have deepened dramatically between the United States, the United Kingdom and Western Europe. These heat