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Financial Crisis, Trade, and Fragmentation

Author

Listed:
  • Deardorff, A.V.
Abstract
Motivated by the Asian financial crises that began in 1997, this paper adds money to a Ricardian model of international trade in order to explore the role of financing costs in general-equilibrium trade. The purpose is to show not only that financing costs matter, but to argue a potentially important effect of a financial crisis. If financial markets suddenly come to expect a country's currency to depreciate, as might happen if it has attempted an unsustainable peg, then that expectation will itself force a depreciation. The depreciation will in turn make it impossible for international traders to repay their financing, and their default will increase the costs of financing trade in subsequent periods. Finally, this crisis-induced increase in costs of trade financing then undermines both trade itself and the gains from trade. The paper also goes on to argue that fragmentation - he splitting of production processes across countries - contributes to both trade and the gains from trade, but in doing so it makes countries more vulnerable to these effects of a financial crisis.

Suggested Citation

  • Deardorff, A.V., 2000. "Financial Crisis, Trade, and Fragmentation," Working Papers 458, Research Seminar in International Economics, University of Michigan.
    • Handle: RePEc:mie:wpaper:458
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    Citations

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    Cited by:

    1. Beladi, Hamid & Chakrabarti, Avik & Marjit, Sugata, 2014. "A Ricardian Theory of Production, Trade and Finance - The Role of Credit Market Imperfection," MPRA Paper 60830, University Library of Munich, Germany.
    2. Sell, Friedrich L., 2001. "Fragmentierung - Außenhandel unter den Bedingungen vertikaler Globalisierung: Ein Überblick," Working Papers in Economics 2001,2, Bundeswehr University Munich, Economic Research Group.
    3. Nicolas Berman & Antoine Berthou, 2009. "Financial Market Imperfections and the Impact of Exchange Rate Movements on Exports," Review of International Economics, Wiley Blackwell, vol. 17(1), pages 103-120, February.
    4. Kin Tang & Hui Tan & Niaz Naseem, 2013. "The effect of foreign currency borrowing and financial development on exports: a dynamic panel analysis on Asia-Pacific countries," Journal of the Asia Pacific Economy, Taylor & Francis Journals, vol. 18(3), pages 460-476.
    5. Nicolas Berman & Antoine Berthou, 2006. "Financial market imperfections and the impact of exchange rate movements," Post-Print halshs-00118834, HAL.
    6. Alan V. Deardorff, 2001. "International Provision of Trade Services, Trade, and Fragmentation," Review of International Economics, Wiley Blackwell, vol. 9(2), pages 233-248, May.
    7. Sugata Marjit & Suryaprakash Mishra, 2016. "Credit, Inequality and Trade," Discussion Papers Series 559, School of Economics, University of Queensland, Australia.

    More about this item

    Keywords

    FINANCIAL CRISIS ; INTERNATIONAL TRADE;

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems

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