The Subprime Crisis

The aim of this paper is to study the contagion effects of the subprime financial crisis on the real economy of developed countries. The contagion of this crisis will be measured by increased linkages between markets after a shock has taken place (the stock market shocks, the interbank spread). The VAR model is utilized to examine the relationship between the U.S. markets and European markets on two sub-periods: a calm period and a crisis period. Our results show that the subprime financial crisis has seriously affected the economic growth of developed countries. The recessionary impact of the financial turmoil in the industrial cycle is confirmed in the United States and Europe. We emphasize that the uncertainty about the proliferation of financial shocks is a recessive factor by its effects on consumption and investment.