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Propagation of Crises across Countries: Trade Roots of Contagion Effects

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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).

Suggested Citation

  • Cukrowski, Jacek & Aksen, Ernest & Fischer, Manfred M., 2002. "Propagation of Crises across Countries: Trade Roots of Contagion Effects," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 55(2), pages 213-227.
  • Handle: RePEc:ris:ecoint:0190
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    More about this item

    Keywords

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

    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • F10 - International Economics - - Trade - - - General
    • F30 - International Economics - - International Finance - - - General
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General

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