Exposure to International Crises: Trade vs. Financial Contagion

65 Pages Posted: 15 Aug 2016

See all articles by Everett Grant

Everett Grant

Federal Reserve Banks - Federal Reserve Bank of Dallas

Multiple version iconThere are 3 versions of this paper

Date Written: 2016-08-01

Abstract

I identify new patterns in countries' economic performance over the 2007-2014 period based on proximity through distance, trade, and finance to the US subprime mortgage and Eurozone debt crisis areas. To understand the causes of the cross-country variation, I develop an open economy model with two transmission channels that can be shocked separately: international trade and finance. The model is the first to include a government and heterogeneous firms that can default independently of one another and has a novel endogenous cost of sovereign default. I calibrate the model to the average experiences of countries near to and far from the crisis areas. Using these calibrations, disturbances on the order of those observed during the late 2000s are separately applied to each channel to study transmission. The results suggest credit disruption as the primary contagion driver, rather than the trade channel. Given the substantial degree of financial contagion, I run a series of counterfactuals studying the efficacy of capital controls and find that they would be a useful tool for preventing similarly severe contagion in the future, so long as there is not capital immobility to the degree that the local sovereign can default without suffering capital flight.

JEL Classification: E32, F40, F41, F44, H63

Suggested Citation

Grant, Everett, Exposure to International Crises: Trade vs. Financial Contagion (2016-08-01). Globalization and Monetary Policy Institute Working Paper No. 280, Available at SSRN: https://ssrn.com/abstract=2822685 or http://dx.doi.org/10.24149/gwp280

Everett Grant (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Dallas ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States

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