Highly synchronized during the Great Recession of 2008-2009, the Euro area and

the US have diverged in the period that followed. To explain this divergence, we

provide a structural interpretation of these episodes through the estimation for both

economies of a business cycle model with financial frictions and risk shocks, mea-

sured as the volatility of idiosyncratic uncertainty in the financial sector. Our results

show that risk shocks have stimulated US growth in the aftermath of the Great Reces-

sion and have been the main driver of the double-dip recession in the Euro area. They

play a positive role in the Euro area only after 2015. Risk shocks therefore seem well

suited to account for the consequences of the sovereign debt crisis in Europe and the

subsequent positive effects of unconventional monetary policies, notably the ECB’s

Asset Purchase Programme (APP).

JEL Codes: E3, E4, G3.

Keywords: Great Recession, Business Cycles, Uncertainty, Risk Shocks, Divergence.