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Trade, Growth, and the International Transmission of Financial Shocks

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  • Ohdoi, Ryoji

Abstract

This study develops a two-country model to explore how financial shocks in one country affect its partner country's business cycles through international trade. Unlike existing studies, I introduce the mechanism of endogenous trade patterns, by which a shock can affect both the intensive and extensive margins of trade. I also embed the mechanism of endogenous growth into the model to indicate the potential for prolonged recessions, even for a transitory shock. I obtain the following four main findings. First, an adverse financial shock in one country induces a global recession, even in the absence of international financial transactions. Second, although the downward shift of real GDP in the partner country is not so large, it can be very prolonged. Third, the real value of exports in the partner drops more seriously than its real GDP. Finally, this drop is caused mainly by a change at the intensive margin rather than the extensive margin.

Suggested Citation

  • Ohdoi, Ryoji, 2020. "Trade, Growth, and the International Transmission of Financial Shocks," MPRA Paper 100756, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:100756
    as

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    References listed on IDEAS

    as
    1. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1002-1037, October.
    2. Kollmann, Robert & Enders, Zeno & Müller, Gernot J., 2011. "Global banking and international business cycles," European Economic Review, Elsevier, vol. 55(3), pages 407-426, April.
    3. Ohdoi, Ryoji, 2018. "International transmission of financial shocks without financial integration," Economics Letters, Elsevier, vol. 170(C), pages 46-49.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Eaton–Kortum model; Endogenous growth; Financial frictions; Financial shocks; International business cycles; Margins of trade;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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