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Financial Crises and International Trade: The Long Way to Recovery

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  • Nicolas Berman

Abstract

Standard theoretical models would predict that a currency depreciation generates an increase in net exports. However, recent emerging market crises, accompanied by sharp exchange rate devaluations, have often been followed by a fall in or a stagnation of exports. This paper provides a simple theoretical framework which shows that a currency crisis affects trade through (i) a competitiveness effect, i.e. a variation in relative prices, that positively influences the intensive margin of trade (the amount of exports by firms); (ii) a balance-sheet effect, i.e. a modification of the fixed cost of exports, which negatively affects the extensive margin of trade (the number of exporters). We derive from our model a gravity-like equation of bilateral sectoral trade which we estimate using data on 27 industries and 32 countries over the period 1976-2002. First, we find that these events have a long-lasting negative impact on exports - which remain below their natural level for five years. We present evidence suggesting that this persistent effect is due to the combination of firms’ foreign currency borrowing and fixed costs of exports, which leads to important balance-sheet problems in the aftermath of the crisis. Second, the net effect of crises on exports largely depends on country specialization: the positive competitiveness effect is magnified by a specialization in high elasticity of substitution’s industries, while negative balance-sheets effects are exacerbated in industries more dependent upon external finance, in which assets are more tangible, or in high fixed costs sectors.

Suggested Citation

  • Nicolas Berman, 2009. "Financial Crises and International Trade: The Long Way to Recovery," Economics Working Papers ECO2009/23, European University Institute.
  • Handle: RePEc:eui:euiwps:eco2009/23
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    Cited by:

    1. Iacovone, Leonardo & Zavacka, Veronika, 2009. "Banking crises and exports : lessons from the past," Policy Research Working Paper Series 5016, The World Bank.
    2. Nicolas Berman & Philippe Martin, 2012. "The Vulnerability of Sub-Saharan Africa to Financial Crises: The Case of Trade," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 60(3), pages 329-364, September.
    3. Molina, Danielken & Roa, Monica, 2014. "The Effect of Credit on the Export Performance of Colombian Exporters," MPRA Paper 56137, University Library of Munich, Germany.
    4. Molina, Danielken & Roa, Monica, 2014. "The Effect of Credit on the Export Performance of Colombian Exporters," MPRA Paper 56137, University Library of Munich, Germany.
    5. Remi Bazillier & Boris Najman, 2017. "Labour and Financial Crises: Is Labour Paying the Price of the Crisis?," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 59(1), pages 55-76, March.
    6. Cecilia Irina Rabontu & Ana Gabriela Babucea, 2014. "Changes In Structure Of Romania'S International Trade," Annals - Economy Series, Constantin Brancusi University, Faculty of Economics, vol. 2, pages 45-51, April.
    7. Roberto Álvarez; J. & Rodrigo Fuentes, 2009. "Entry into Export Markets and Product Quality Differences," Working Papers Central Bank of Chile 536, Central Bank of Chile.
    8. Gamberoni, Elisa & Von Uexkull, Erik & Weber, Sebastian, 2010. "The Roles of Openness and Labor Market Institutions for Employment Dynamics during Economic Crises," World Bank - Economic Premise, The World Bank, issue 29, pages 1-5, August.
    9. Nicolas Berman and Philippe Martin, 2010. "The Vulnerability Of Sub-Saharan Africa To The Financial Crisis: The Case Of Trade," RSCAS Working Papers 2010/15, European University Institute.
    10. George GEORGESCU, 2012. "Changes In The Pattern Of Romania’S Foreign Trade Under The Global Crisis Impact," Romanian Journal of Economics, Institute of National Economy, vol. 35(2(44)), pages 139-159, December.
    11. Mohamed Ben Abdallah & Zouheir Bouchaddakh, 2013. "Banking and Monetary Crises: Impacts on Exports of MENA Countries," Working Papers 786, Economic Research Forum, revised Oct 2013.
    12. repec:rrs:journl:v:11:y:2017:i:1:p:1-17 is not listed on IDEAS
    13. repec:taf:jriskr:v:20:y:2017:i:2:p:195-217 is not listed on IDEAS
    14. Georgescu, George, 2012. "Impactul crizei globale asupra structurii comerţului exterior al României
      [The Global Crisis Impact on Romanian Trade Structure]
      ," MPRA Paper 36339, University Library of Munich, Germany.
    15. Feng, Ling & Lin, Ching-Yi, 2013. "Financial shocks and exports," International Review of Economics & Finance, Elsevier, vol. 26(C), pages 39-55.

    More about this item

    Keywords

    Currency Crises; International Trade; Gravity Equation; Balance-sheet effects; Fixed Costs;

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F17 - International Economics - - Trade - - - Trade Forecasting and Simulation
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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