Propagation of Crises Across Countries: Trade Roots of Contagion Effects

Economia Internazionale, Vol. 55, No. 2, pp. 213-227, 2009

Posted: 20 Dec 2009

See all articles by Jacek Cukrowski

Jacek Cukrowski

CASE - Center for Social and Economic Research

Ernest Aksen

affiliation not provided to SSRN

Manfred M. Fischer

Vienna University of Economics and Business - Institute for Economic Geography and GIScience, Department of Socioeconomics

Date Written: December 15, 2009

Abstract

The paper provides an explanation of the mechanisms underlying trade roots of the contagion effects emanating from the recent turmoils. It is argued that under demand uncertainty risk averse behavior of firms provides a basis for international trade. The paper shows by means of a simple two-country model that risk averse firms operating in perfectly competitive markets with uncertainty of demand tend to diversify markets what gives a basis for international trade in identical commodities even between identical countries. It is shown that such trade may be welfare improving despite efficiency losses due to cross-hauling and transportation costs. The analysis reveals that change of the expectations concerning market conditions caused by the turmoil in the neighbor country (i.e., shift in the perception of market conditions) may lead to macroeconomic destabilization (increase in price level and unemployment, worsening of terms of trade, and deterioration of trade balance).

Keywords: Crises propagation, contagion, reasons for trade, intra-industry trade, demand uncertainty, risk aversion, market diversification

JEL Classification: D8, F1, F3, F4

Suggested Citation

Cukrowski, Jacek and Aksen, Ernest and Fischer, Manfred M., Propagation of Crises Across Countries: Trade Roots of Contagion Effects (December 15, 2009). Economia Internazionale, Vol. 55, No. 2, pp. 213-227, 2009. Available at SSRN: https://ssrn.com/abstract=1523732

Jacek Cukrowski

CASE - Center for Social and Economic Research ( email )

Center for Social and Economic Research,
Warsaw
Poland

Ernest Aksen

affiliation not provided to SSRN ( email )

Manfred M. Fischer (Contact Author)

Vienna University of Economics and Business - Institute for Economic Geography and GIScience, Department of Socioeconomics ( email )

Welthandelsplatz 1, D4
Vienna, 1020
Austria

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