Munich Personal RePEc Archive

Output falls and the international transmission of crises

Brinca, Pedro and João, Costa-Filho (2021): Output falls and the international transmission of crises.

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Abstract

Economic crises are usually transmitted across countries via either price or quantity shocks on the balance of payments. This paper complements the literature on international trade and business cycles by analyzing the role of imported intermediates goods inputs during the Great Financial Crisis in small open economies. We find that in an increasingly integrated world, intra-industry international trade is an important channel of propagation of shocks. A depreciation of the real exchange rate rises to costs of intermediate output, which decreases production. Our quantitative model is able to reproduce both the intensity and the velocity of the crisis in Mexico.

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