Working Paper: NBER ID: w16666
Authors: Jonathan Eaton; Samuel Kortum; Brent Neiman; John Romalis
Abstract: We develop a dynamic multi-country general equilibrium model to investigate forces acting on the global economy during the Great Recession and ensuing recovery. Our multi-sector framework accounts completely for countries' trade, investment, production, and GDPs in terms of different sets of shocks. Applying the model to 21 countries, we investigate the 29 percent drop in world trade in manufactures during 2008-2009. A shift in final spending away from tradable sectors, largely caused by declines in durables investment efficiency, account for most of the collapse in trade relative to GDP. Shocks to trade frictions, productivity, and demand play minor roles.
Keywords: Global Trade; Recession; Investment Efficiency; International Trade
JEL Codes: E3; F1; F4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Declines in the efficiency of investment in durable manufactures (E22) | Overall collapse in trade (F19) |
| Declines in the efficiency of investment in durable manufactures (E22) | Significant reductions in trade relative to GDP (F69) |
| Declines in demand for nondurable manufactures (L69) | Trade collapse (F69) |
| Increases in trade frictions in large economies (China, US) (F69) | Decline in global trade relative to GDP (F69) |
| Productivity shocks in nontraded sectors (O49) | Global trade (F19) |
| Simultaneous declines in investment efficiency across multiple countries (F64) | Severity of domestic declines affecting trade outcomes (F69) |