International Trade and Real Transmission Channels of Financial Shocks in Globalized Production Networks

32 Pages Posted: 22 May 2009 Last revised: 5 Nov 2009

See all articles by Hubert Escaith

Hubert Escaith

Aix-Marseille University (Aix-Marseille School of Economics), GREQAM, CNRS & EHESS; SUIBE, WTO Program; Bournemouth University

Fabien Gonguet

Ecole Polytechnique, Paris

Date Written: May 22, 2009

Abstract

The article analyses the role of international supply chains as transmission channels of a financial shock. Because individual firms are interdependent and rely on each other, either as supplier of intermediate goods or client for their own production, an exogenous financial shock affecting a single firm, such as the termination of a line of credit, reverberates through the productive chain. The transmission of the initial financial shock through real channels is tracked by modelling input-output interactions. When banks operate at the limit of their institutional capacity, defined by the capital adequacy ratio, and if assets are priced to market, then a resonance effect amplifies the back and forth transmission between real and monetary circuits. The paper illustrates the proposed methodology by computing a supply-driven indicator and indirect demand-driven impacts on five interconnected economies of different characteristics: China, Japan, Malaysia, Thailand and the United States.

Keywords: international supply chains, monetary circuit, real linkages, transmission channels of financial shock, Asian International Input-Output Tables

JEL Classification: C67, F23, F36, G01, L16

Suggested Citation

Escaith, Hubert and Gonguet, Fabien, International Trade and Real Transmission Channels of Financial Shocks in Globalized Production Networks (May 22, 2009). Available at SSRN: https://ssrn.com/abstract=1408584 or http://dx.doi.org/10.2139/ssrn.1408584

Hubert Escaith (Contact Author)

Aix-Marseille University (Aix-Marseille School of Economics), GREQAM, CNRS & EHESS ( email )

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Fabien Gonguet

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