How Does Trade Evolve in the Aftermath of Financial Crises&quest

Abdul Abiad, Prachi Mishra and Petia Topalova

IMF Economic Review, 2014, vol. 62, issue 2, 213-247

Abstract: International trade collapsed in 2008–09, particularly in countries that experienced a financial crisis. Was this collapse unique or part of a broader historical pattern? Using an augmented gravity model and 179 episodes from 1970 to 2009, we find that financial crises are associated with sharp declines in imports of the crisis country—19 percent, on average, in the year following a crisis—and this decline is persistent, with imports recovering to their gravity-predicted levels only after 10 years. In contrast, exports of the crisis country fall modestly and then remain close to or even above the predicted level. The protracted drop in imports post crisis is consistent with evidence of a sustained depreciation of the exchange rate and impaired credit conditions following crises.

Date: 2014
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