Working Paper: NBER ID: w24503
Authors: Paul Bergin; Ling Feng; Chingyi Lin
Abstract: This paper demonstrates theoretically that a financial shock can have very persistent effects on international trade. Motivation is taken from the aftermath of the dramatic trade collapse in 2008-9, which despite a substantial recovery, has left a persistently slower growth rate in trade. We find conditions under which a transitory financial shock significantly reduces the investment by firms in entering the export market, and that this can have long-lasting effects on the range of goods exported and hence overall trade. Important to our mechanism are endogenous capital structure decisions by firms in response to the financial shock, and firm entry investment that requires traded goods. This mechanism provides an example of how firm dynamics can serve as a potent propagation mechanism, generating very long-lasting effects of transitory macroeconomic shocks.
Keywords: financial shocks; international trade; extensive margin; firm dynamics
JEL Codes: F4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| transitory financial shock (E44) | firm investment in entering the export market (F23) |
| firm investment in entering the export market (F23) | range of goods exported (F10) |
| range of goods exported (F10) | overall trade volume (F10) |
| transitory financial shock (E44) | extensive margin of trade (F10) |
| extensive margin of trade (F10) | future investment costs (G31) |
| future investment costs (G31) | overall trade volume (F10) |