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Propagation of Crises across Countries: Trade Roots of Contagion Effects

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Author Info

  • Cukrowski, Jacek

    ()
    (UNDP Regional Bureau for Europe and CIS, Bratislava Regional Centre)

  • Aksen, Ernest

    ()
    (Belarus State Economic University)

  • Fischer, Manfred M.

    ()
    (Vienna University of Economics and Business Administration)

Abstract

The paper provides an explanation of the mechanisms underlying trade roots of the contagion effects emanating from the recent turmoils. It is argued that under demand uncertainty risk averse behavior of firms provides a basis for international trade. The paper shows by means of a simple two-country model that risk averse firms operating in perfectly competitive markets with uncertainty of demand tend to diversify markets what gives a basis for international trade in identical commodities even between identical countries. It is shown that such trade may be welfare improving despite efficiency losses due to cross-hauling and transportation costs. The analysis reveals that change of the expectations concerning market conditions caused by the turmoil in the neighbor country (i.e., shift in the perception of market conditions) may lead to macroeconomic destabilization (increase in price level and unemployment, worsening of terms of trade, and deterioration of trade balance).

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Bibliographic Info

Article provided by Camera di Commercio di Genova in its journal Economia Internazionale / International Economics.

Volume (Year): 55 (2002)
Issue (Month): 2 ()
Pages: 213-227

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Handle: RePEc:ris:ecoint:0190

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Related research

Keywords: Crises propagation; contagion; reasons for trade; intra-industry trade; demand uncertainty; risk aversion; market diversification;

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