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Propagation of Crises across Countries: Trade Roots of Contagion Effects

Jacek Cukrowski (), Ernest Aksen () and Manfred Fischer
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Ernest Aksen: Belarus State Economic University, Postal: 26, Partizanski Av, Minsk, 220070, Republic of Belarus, http://www.bseu.by/english/

Economia Internazionale / International Economics, 2002, vol. 55, issue 2, 213-227

Abstract: The paper provides an explanation of the mechanisms underlying trade roots of the contagion effects emanating from the recent turmoils. It is argued that under demand uncertainty risk averse behavior of firms provides a basis for international trade. The paper shows by means of a simple two-country model that risk averse firms operating in perfectly competitive markets with uncertainty of demand tend to diversify markets what gives a basis for international trade in identical commodities even between identical countries. It is shown that such trade may be welfare improving despite efficiency losses due to cross-hauling and transportation costs. The analysis reveals that change of the expectations concerning market conditions caused by the turmoil in the neighbor country (i.e., shift in the perception of market conditions) may lead to macroeconomic destabilization (increase in price level and unemployment, worsening of terms of trade, and deterioration of trade balance).

Keywords: Crises propagation; contagion; reasons for trade; intra-industry trade; demand uncertainty; risk aversion; market diversification (search for similar items in EconPapers)
JEL-codes: D80 F10 F30 F40 (search for similar items in EconPapers)
Date: 2002
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Persistent link: https://EconPapers.repec.org/RePEc:ris:ecoint:0190

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