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

See all articles by Alok Johri

Alok Johri

McMaster University - Department of Economics

Terry Yip

McMaster University

Date Written: June 7, 2017

Abstract

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

Johri, Alok and Yip, Terry, Financial Shocks, Supply-Chain Relationships, and the Great Trade Collapse (June 7, 2017). McMaster University Department of Economics, Working paper No. 2017-11, Available at SSRN: https://ssrn.com/abstract=3006583 or http://dx.doi.org/10.2139/ssrn.3006583

Alok Johri (Contact Author)

McMaster University - Department of Economics ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada

Terry Yip

McMaster University ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada

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