After the Panic: Are Financial Crises Demand or Supply Shocks? Evidence from International Trade
American Economic Review: Insights
vol. 2,
no. 4, December 2020
(pp. 509-26)
Abstract
Are financial crises a negative shock to aggregate demand or supply? This is a fundamental question for research and policy making. Arguments for stimulus usually presume demand-side shortfalls; arguments for tax cuts or structural reform look to the supply side. Resolving the question requires models with both mechanisms, and empirical tests to tell them apart. We develop a small open economy model, where a country is subject to deleveraging shocks that impose binding credit constraints on households and/or firms. These financial crisis events leave distinct statistical signatures in the time series record that divide sharply between each type of shock. Empirical analysis reveals a clear picture: after financial crises the dominant pattern is that imports contract, exports hold steady or even rise, and the real exchange rate depreciates. History shows financial crises are predominantly a negative shock to demand.Citation
Benguria, Felipe, and Alan M. Taylor. 2020. "After the Panic: Are Financial Crises Demand or Supply Shocks? Evidence from International Trade." American Economic Review: Insights, 2 (4): 509-26. DOI: 10.1257/aeri.20190533Additional Materials
JEL Classification
- F14 Empirical Studies of Trade
- F31 Foreign Exchange
- F41 Open Economy Macroeconomics
- G01 Financial Crises
- N10 Economic History: Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations: General, International, or Comparative
- N20 Economic History: Financial Markets and Institutions: General, International, or Comparative
- N70 Economic History: Transport, International and Domestic Trade, Energy, Technology, and Other Services: General, International, or Comparative