Working Paper: NBER ID: w16269
Authors: Richard S. Grossman; Christopher M. Meissner
Abstract: We focus on two international aspects of the Great Depression--financial crises and international trade-- and try to discern lessons for the current economic crisis. Both downturns featured global banking crises which were generated by boom-slump macroeconomic cycles. During both crises, world trade collapsed faster than world incomes and the trade decline was highly synchronized across countries. In the Depression, income losses and rises in trade barriers explain trade's collapse. Due to vertical specialization and more intense trade in durables, today's trade collapse is due to uncertainty and small shocks to trade costs hitting international supply chains. So far, the global economy has avoided the global trade wars and banking collapses of the Depression perhaps due to improved policy. Even so, the global economy remains susceptible to large shocks due to financial innovation and technological change as recent events illustrate.
Keywords: Great Depression; 2007 crisis; banking crises; international trade; financial crises
JEL Codes: E50; F15; F4; N10; N70
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Banking crises (G01) | Economic downturns (E32) |
| Banking failures (F65) | Reduced credit availability (G21) |
| Reduced credit availability (G21) | Diminished economic activity (F69) |
| Banking crises (G01) | Deeper and prolonged economic contractions (E32) |
| International spread of banking crises (F65) | Global nature of the Great Depression (F65) |
| Income declines (E25) | Collapse of international trade (F69) |
| Rising trade barriers (F69) | Collapse of international trade (F69) |
| Protectionist policies (F13) | Rising trade barriers (F69) |
| Uncertainty in global markets (F69) | Rising trade barriers (F69) |