After the Panic: Are Financial Crises Demand or Supply Shocks? Evidence from International Trade

Felipe Benguria and Alan Taylor

American Economic Review: Insights, 2020, vol. 2, issue 4, 509-26

Abstract: Are financial crises a negative shock to aggregate demand or supply? This is a fundamental question for research and policy making. Arguments for stimulus usually presume demand-side shortfalls; arguments for tax cuts or structural reform look to the supply side. Resolving the question requires models with both mechanisms, and empirical tests to tell them apart. We develop a small open economy model, where a country is subject to deleveraging shocks that impose binding credit constraints on households and/or firms. These financial crisis events leave distinct statistical signatures in the time series record that divide sharply between each type of shock. Empirical analysis reveals a clear picture: after financial crises the dominant pattern is that imports contract, exports hold steady or even rise, and the real exchange rate depreciates. History shows financial crises are predominantly a negative shock to demand.

JEL-codes: F14 F31 F41 G01 N10 N20 N70 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (18)

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Working Paper: After the Panic: Are Financial Crises Demand or Supply Shocks? Evidence from International Trade (2019)
Working Paper: After the Panic: Are Financial Crises Demand or Supply Shocks? Evidence from International Trade (2019)
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DOI: 10.1257/aeri.20190533

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