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International trade and real transmission channels of financial shocks in globalized production networks

Hubert Escaith () and Fabien Gonguet

No ERSD-2009-06, WTO Staff Working Papers from World Trade Organization (WTO), Economic Research and Statistics Division

Abstract: Because individual firms are interdependent and rely on each other, either as supplier of intermediate goods or client for their own production, an exogenous financial shock affecting a single firm, such as the termination of a line of credit, reverberates through the productive chain. The transmission of the initial financial shock through real channels is tracked by modelling input-output interactions. The paper indicates that when banks operate at the limit of their institutional capacity, defined by the capital adequacy ratio, and if assets are priced to market, then a resonance effect amplifies the back and forth transmission between real and monetary circuits. The paper illustrates the proposed methodology by computing a supply-driven indicator (IRSIC) and indirect demand-driven impacts on five interconnected economies of different characteristics: China, Japan, Malaysia, Thailand and the United States.

Keywords: international supply chains; monetary circuit; real linkages; transmission channels of financial shock; Asian International Input-Output Tables (search for similar items in EconPapers)
JEL-codes: C67 F23 F36 G01 L16 (search for similar items in EconPapers)
Date: 2009
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