International Trade and Real Transmission Channels of Financial Shocks in Globalized Production Networks

Escaith, Hubert and Gonguet, Fabien (2009): International Trade and Real Transmission Channels of Financial Shocks in Globalized Production Networks. Published in: Staff Working Paper ERSD No. 2009-06 (May 2009)

Abstract

The article analyses the role of international supply chains as transmission channels of a financial shock. 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.

• Item Type: MPRA Paper
• Language: English
• Keywords: international supply chains, monetary circuit, real linkages, transmission channels of financial shock, Asian International Input-Output Tables
• Subjects: G - Financial Economics > G1 - General Financial Markets; L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L16 - Industrial Organization and Macroeconomics: Industrial Structure and Structural Change ; Industrial Price Indices; F - International Economics > F2 - International Factor Movements and International Business > F23 - Multinational Firms ; International Business; C - Mathematical and Quantitative Methods > C6 - Mathematical Methods ; Programming Models ; Mathematical and Simulation Modeling > C67 - Input-Output Models; F - International Economics > F3 - International Finance > F36 - Financial Aspects of Economic Integration

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