Financial Shocks, Supply-Chain Relationships, and the Great Trade Collapse
McMaster University Department of Economics, Working paper No. 2017-11
40 Pages Posted: 25 Jul 2017
Date Written: June 7, 2017
The collapse in trade relative to GDP during 2008-09 was unusually large historically and puzzling relative to the predictions of canonical two-country models. In a calibrated dynamic general equilibrium two-country model where firms must build supply chain relationships in order to sell their product, we show that a tightening of credit can cause a sizable fall in the trade-GDP ratio (44 percent of the observed value) while productivity shocks cannot. The key mechanism underlying the sharper fall in trade relative to GDP involves an endogenous reallocation of scarce resources from international to domestic supply-chains, that are acquired and maintained at lower cost.
Keywords: Credit Shocks, News Shocks, Supply Chains, Relationship Capital, Trade Collapse
JEL Classification: E32, F41, F44
Suggested Citation: Suggested Citation