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Are Trade Linkages Important Determinants of Country Vulnerability to Crises?

In: Preventing Currency Crises in Emerging Markets

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  • Kristin J. Forbes

Abstract

This paper measures whether trade linkages are important determinants of a country's vulnerability to crises that originate elsewhere in the world. It explains that trade can transmit crises internationally via three distinct, and possible counteracting, channels: a competitiveness effect (when changes in relative prices affect a country's ability to compete abroad); an income effect (when a crisis affects incomes and the demand for imports); and a cheap-import effect (when a crisis reduces import prices and acts as a positive supply shock). Next, the paper develops a series of statistics measuring each of these trade linkages for a sample of 58 countries during 16 crises from 1994 through 1999. Of particular interest is the competitiveness statistic, which uses 4-digit industry information to calculate how each crisis affects exports from other countries. Empirical results suggest that countries which compete with exports from a crisis country and which export to the crisis country (i.e. the competitiveness and income effects) had significantly lower stock market returns. Although trade linkages only partially explain stock market returns during recent crises, they are significant and economically important.
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Suggested Citation

  • Kristin J. Forbes, 2002. "Are Trade Linkages Important Determinants of Country Vulnerability to Crises?," NBER Chapters, in: Preventing Currency Crises in Emerging Markets, pages 77-132, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberch:10634
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    References listed on IDEAS

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    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

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