Financial crisis : origins, macroeconomic consequences and policy response

Abstract

The global financial crisis of 2007-2008 is considered to have been the worst economic recession since the Great Depression. Its beginning is associated with the bursting of the US housing bubble in 2007 and the financial panic of 2008. It led to a collapse of many financial institutions and others were prevented from bankruptcy by the bailouts provided by national governments. Malfunctioning debt markets and increased uncertainty played a crucial role in transmission of the financial disturbances to the real sector. This in turn caused large drops in output and dramatic hikes in unemployment rates across the developed countries that persisted for a long period of time after the onset of the financial crisis. Economic slowdown triggered an unprecedented response of central banks (through balance sheet expansions) and governments (through fiscal stimuli). In this thesis I address topics that are associated with three subsequent stages of the crisis. In Chapter 1, I analyze a question that concerns the origins of the financial collapse. More precisely, I study the impact of changes in competition in the banking industry on financial stability and business cycle dynamics. This paper is motivated by a heated debate that started in aftermath of the crisis: many economists pointed out that the financial deregulation of the 1970s and the 1980s was one of the main causes of the global crisis of 2007-2008. Chapter 2 is related to economic phenomenon that is characteristic for the stage that follows the financial turmoil - high unemployment. In particular, I construct unemployment decomposition method based on the DSGE model that enables to divide the observed rate of unemployment into frictional and Keynesian components. I use this procedure to analyze the unemployment structure in four European economies: Germany, France, Italy and Spain. The last part of my thesis - Chapter 3 - is devoted to the stage of crisis in which government takes actions that are aimed at fighting the negative macroeconomic consequences of financial collapse. More specifically, I build a tractable framework with search frictions in the market for products and simple supply structure within the manufacturing sector to discuss the impact of an increase in government spending on aggregate output and consumption.