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International Trade and Real Transmission Channels of Financial Shocks in Globalized Production Networks

The article analyses the role of international supply chains as transmission channels of a financial shock.

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Because individual firms are interdependent and rely on each other, either as supplier of intermediate goods or client for their own production, an exogenous financial shock affecting a single firm, such as the termination of a line of credit, reverberates through the productive chain. The transmission of the initial financial shock through real channels is tracked by modelling input-output interactions. The paper indicates that when banks operate at the limit of their institutional capacity, defined by the capital adequacy ratio, and if assets are priced to market, then a resonance effect amplifies the back and forth transmission between real and monetary circuits. The paper illustrates the proposed methodology by computing a supply-driven indicator (IRSIC) and indirect demand-driven impacts on five interconnected economies of different characteristics: China, Japan, Malaysia, Thailand and the United States.

No: ERSD-2009-06

Author:
Hubert Escaith Ś WTO
Fabien Gonguet — École Polytechnique-ENSAE, Paris

Manuscript date: May 2009

Key Words:

International supply chains, monetary circuit, real linkages, transmission channels of financial shock, Asian International Input-Output Tables

JEL classification numbers:

C67, F23, F36, G01, L16

 
  

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This is a working paper, and hence it represents research in progress. This paper represents the opinions of the author, and is the product of professional research. It is not meant to represent the position or opinions of the WTO or its Members, nor the official position of any staff members. Any errors are the fault of the author. Copies of working papers can be requested from the divisional secretariat by writing to: Economic Research and Statistics Division, World Trade Organization, Rue de Lausanne 154, CH 1211 Geneva 21, Switzerland. Please request papers by number and title.

Download paper in pdf format (33 pages, 334KB)