Highly synchronized during the Great Recession of 2008-2009, Euro area and US economies have diverged since.This paper assesses the role of financial frictions and credit allocation to non-financial corporations in explaining the divergence observed between the two economies.A positive risk shock increases the volatility of idiosyncratic uncertainty in the financial sector making credit interest rate higher and corporate credit lower.Risk shocks dominate all other shocks in explaining the divergence after the financial crisis between the two economies.Risk shocks have stimulated US growth in the aftermath of the Great Recession and have been the main driver of the double-dip recession in the Euro area.
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