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Trade and the Geographic Spread of the Great Recession

Sebastian Stumpner

No 638, 2014 Meeting Papers from Society for Economic Dynamics

Abstract: I use the large spatial variation in consumer demand shocks at the onset of the Great Recession to study the mechanisms behind the ensuing geographic spread of the crisis. While the initial increase in unemployment was concentrated in areas with housing busts, subsequently unemployment slowly spread across space. By 2009, it was above pre-crisis levels in almost all U.S. counties. I show that trade was an important driver of this geographic spread of the crisis. To identify the trade channel empirically, I make use of heterogeneity in the direction of trade flows across industries in the same state: Industries that sold relatively more to states with housing boom-bust cycles grew by more before the crisis and declined faster from 2007-09. These results cannot be explained by a collapse in credit supply. I then link the reduced form empirical evidence to a formal model of contagion through trade. In a quantitative exercise, the model delivers a cross-sectional effect of similar magnitude as the one found empirically and reveals that the trade channel can explain roughly half of the overall spread.

Date: 2014
New Economics Papers: this item is included in nep-dge and nep-ure
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Journal Article: Trade and the geographic spread of the great recession (2019) Downloads
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