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Spillovers of Domestic Shocks: Will They Counteract the ‘Great Moderation’?
Author(s) -
Carare Alina,
Mody Ashoka
Publication year - 2012
Publication title -
international finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.458
H-Index - 39
eISSN - 1468-2362
pISSN - 1367-0271
DOI - 10.1111/j.1468-2362.2012.01298.x
Subject(s) - great moderation , economics , volatility (finance) , spillover effect , monetary economics , emerging markets , international economics , macroeconomics , econometrics
The protracted decline in output volatility – the G reat M oderation – began to reach its limits by the mid‐1990s, and volatility even showed a mild rise in some countries. Domestic shocks did not typically rise but we find that they did spread more rapidly across borders. One reason for the faster transmission of domestic shocks was the increased fragmentation of production across multiple global locations that increasingly included the more volatile emerging markets. Although this development was generally benign, it had latent implications for triggering spikes in volatility since domestic stresses could rapidly spillover across borders. The cascading effects of such spillovers were vividly demonstrated by the trade collapse during the G reat R ecession of 2008–09.