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Financial Shocks,Supply-chain Relationships and the Great Trade Collapse

Alok Johri () and Terry Yip

Department of Economics Working Papers from McMaster University

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 relationship 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.

JEL-codes: E32 F41 F44 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-int, nep-mac and nep-opm
Date: 2017-06-07
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