The Role of Vertical Linkages in the Propagation of the Global Downturn of 2008

Beginning in mid-2007, the world witnessed a sequence of increasingly disturbing outcomes in the housing and financial sectors in the United States and several European countries. Then, in September 2008, a critical point was reached with the entire U.S. financial system seemingly reaching the brink of collapse and Europe simultaneously experiencing multiple financial crises. Until that month, most countries and most nonfinancial sectors had been spared any significant spillover effects emanating from the distressed financial sectors in the U.S. and other countries. After that watershed month, the crisis became truly global in its geographic and sectoral reach. Of the 14 countries whose GDP exceeded 1 trillion dollars in 2007, countries which collectively account for three-fourths of world GDP, only India and China experienced growth in the last quarter of 2008 and the first quarter of 2009. The other 12 countries all suffered real GDP declines, ranging from 2.5 percent in Canada to 10.8 percent in Russia. The change in global GDP growth between the middle two quarters of 2008 and the ensuing two ∗PRELIMINARY. The views expressed here are those of the authors and are not necessarily reflective of views of the Federal Reserve Bank of Philadelphia, the Federal Reserve System, or the International Monetary Fund.