Working Paper: CEPR ID: DP17163
Authors: Chenzi Xu
Abstract: I show that a disruption to the financial sector can reshape the patterns of global tradefor decades. I study the first modern global banking crisis originating in London in 1866and collect archival loan records that link multinational banks headquartered thereto their lending abroad. Countries exposed to bank failures in London immediatelyexported significantly less and did not recover their lost growth relative to unexposedplaces. Their market shares within each destination also remained significantly lower forfour decades. Decomposing the persistent market-share losses shows that they primarilystem from lack of extensive margin growth, as the financing shock caused importers tosource more from new trade partnerships. Exporters producing more substitutablegoods, those with little access to alternative forms of credit, and those trading withmore distant partners experienced more persistent losses, consistent with the existenceof sunk costs and the importance of finance for intermediating trade.
Keywords: Crisis; International Banks; International Trade; History
JEL Codes: F14; G01; G21; N20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Bank failures in London (F65) | Decline in export volumes (F14) |
| Bank failures in London (F65) | Long-term lower market shares for exporters (F14) |
| Lack of extensive margin growth (F66) | Persistent loss of market share (L19) |
| Limited access to alternative financing (G32) | Pronounced losses for exporters (F14) |
| Financial shock (F65) | Lasting impact on trade dynamics (F69) |