Trade, Growth, and the International Transmission of Financial Shocks

Ohdoi, Ryoji (2020): Trade, Growth, and the International Transmission of Financial Shocks.

Abstract

This study develops a two-country model to explore how financial shocks in one country affect its partner country's business cycles through international trade. Unlike existing studies, I introduce the mechanism of endogenous trade patterns, by which a shock can affect both the intensive and extensive margins of trade. I also embed the mechanism of endogenous growth into the model to indicate the potential for prolonged recessions, even for a transitory shock. I obtain the following four main findings. First, an adverse financial shock in one country induces a global recession, even in the absence of international financial transactions. Second, although the downward shift of real GDP in the partner country is not so large, it can be very prolonged. Third, the real value of exports in the partner drops more seriously than its real GDP. Finally, this drop is caused mainly by a change at the intensive margin rather than the extensive margin.

• Item Type: MPRA Paper
• Language: English
• Keywords: Eaton–Kortum model; Endogenous growth; Financial frictions; Financial shocks; International business cycles; Margins of trade
• Subjects: E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E22 - Investment ; Capital ; Intangible Capital ; Capacity; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy; F - International Economics > F1 - Trade > F11 - Neoclassical Models of Trade; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F44 - International Business Cycles; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O41 - One, Two, and Multisector Growth Models

References

Alvarez, F. (2017) Capital Accumulation and International Trade, Journal of Monetary Economics 91, 1-18.

Alvarez, F. and R. E. Lucas (2007) General Equilibrium Analysis of the Eaton-Kortum Model of International Trade, Journal of Monetary Economics 54, 1726-1768.

Amiti, M. and D. Weinstein (2011) Exports and Financial Shocks, Quarterly Journal of Economics 126, 1841-1877.

Arkolakis, C. and A. Ramanarayanan (2009) Vertical Specialization and International Business Cycle Synchronization, Scandinavian Journal of Economics 111, 655-680.

Arrow, K. J. (1962) The Economic Implications of Learning by Doing, Review of Economic Studies 29, 155-173.

Behrens, K., G. Corcos, and G. Mion (2013) Trade Crisis? What Trade Crisis? Review of Economics and Statistics 95, 702-709.

Buera, F. and B. Moll (2015) Aggregate Implications of a Credit Crunch: The Importance of Heterogeneity, American Economic Journal: Macroeconomics 7, 1-42.

Bricongne, J-C., L. Fontagne, G. Gaulier, D. Taglioni, and V. Vicard (2012) Firms and the Global Crisis: French Exports in the Turmoil, \textit{Journal of International Economics 87, 134-146.

Buera, F. and J. P. Nicolini (2017) Liquidity Traps and Monetary Policy: Managing a Credit Crunch, Staff Report 540, Federal Reserve Bank of Minneapolis.

Chor, D. and K. Manova (2012) Off the Cliff and Back? Credit Conditions and International Trade during the Global Financial Crisis, Journal of International Economics 87, 117-133.

Dedola, L. and G. Lombardo (2012) Financial Frictions, Financial Integration and the International Propagation of Shocks, Economic Policy 27, 319-59.

Devereux, M. B. and A. Sutherland (2011) Evaluating International Financial Integration under Leverage Constraints, European Economic Review 55, 427-442.

Devereux, M. B. and J. Yetman (2010) Leverage Constraints and the International Transmission of Shocks, Journal of Money, Credit and Banking 42, 71-105.

Eaton, J., and S. Kortum (2002) Technology, Geography, and Trade, Econometrica 70, 1741 - 1779

Eaton, J., S. Kortum, B. Neiman, and J. Romalis (2016) Trade and Global Recession, American Economic Review 106, 3401-3438.

Feng, L. and C-Y. Lin (2013) Financial Shocks and Exports, International Review of Economics and Finance 26, 39-55.

Guerron-Quintana, P. A. and R. Jinnai (2019) Financial Frictions, Trends, and the Great Recession, Quantitative Economics, 10, 735-777.

Heathcote, J. and F. Perri (2002) Financial Autarky and International Business Cycles, Journal of Monetary Economics 49, 601-627.

Heathcote, J. and F. Perri (2004) Financial Globalization and Real Regionalization, Journal of Economic Theory 119, 207-243.

Hirano, T. and N. Yanagawa (2018) Asset bubbles, Endogenous Growth, and Financial Frictions, Review of Economic Studies 84, 406-443.

Imura, Y. and J. K. Thomas (2016) International Transmission of Credit Shocks in an Equilibrium Model with Production Heterogeneity, Mimeo.

Jermann, U. and V. Quadrini (2012) Macroeconomic Effects of Financial Shocks, American Economic Review 102, 238-271.

Kahn, T., and J. K. Thomas (2013) Credit Shocks and Aggregate Fluctuations in an Economy with Production Heterogeneity, Journal of Political Economy 121, 1055-1107.

Kobayashi, K., and D. Shirai (2018) Debt-Ridden Borrowers and Economic Slowdown, CIGS Working Paper Series 18-003E, The Canon Institute for Global Studies.

Kollmann, R., Z. Enders, and G. J. Muller (2011) Global Banking and International Business Cycles, European Economic Review 55, 407-426.

Kose, M. A. and K.-M. Yi (2006) Can the Standard International Business Cycle Model Explain the Relation between Trade and Comovement? Journal of International Economics 68, 267-295.

Kunieda, T. and A. Shibata (2016) Asset Bubbles, Economic Growth, and a Self-Fulfilling Financial Crisis, Journal of Monetary Economics 82, 70-84.

Kunieda, T. and A. Shibata (2017) Investors, Financiers, and Boom-Bust Cycles, Macroeconomic Dynamics 21, 785-816.

Mino, K. (2015) A Simple Model of Endogenous Growth with Financial Frictions and Firm Heterogeneity, Economics Letters 127, 20-23.

Mino, K. (2016) Fiscal Policy in a Growing Economy with Financial Frictions and Firm Heterogeneity, Japanese Economic Review 67, 3-30.

Mutreja, P., B. Ravikumar, R. Riezman, and M. Sposi (2014) Price Equalization, Trade Flows, and Barriers to Trade, European Economic Review 70, 383-398.

Mutreja, P., B. Ravikumar, and M. Sposi (2018) Capital Goods Trade, Relative Prices, and Economic Development, Review of Economic Dynamics 27, 101-122.

Naito, T. (2017) An Eaton-Kortum Model of Trade and Growth, Canadian Journal of Economics 50, 456-486.

Ohdoi, R. (2018) International Transmission of Financial Shocks without Financial Integration, Economics Letters 170, 46-49.

Perri, F. and V. Quadrini (2018) International Recessions, American Economic Review 108, 935-984.

Ravikumar, B., A. M. Santacreu, and M. Sposi (2018) Capital Accumulation and Dynamic Gains from Trade, Journal of International Economics 119, 93-110.

Romer, P. M. (1986) Increasing Returns and Long-Run Growth, Journal of Political Economy 94, 1002-1037.

Shi, S. (2015) Liquidity, Assets and Business Cycles, Journal of Monetary Economics 70, 116-132.

Waugh, M. E. (2010) International Trade and Income Differences, American Economic Review 22, 2093-2124.

World Trade Organization (2009) International Trade Statistics 2009

Yao, W. (2019) International Business Cycles and Financial Frictions, Journal of International Economics 118, 283-291.