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Why is trade so volatile? The great trade collapse of 2008/09
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Novy, Dennis and Taylor, Alan M. (2011) Why is trade so volatile? The great trade collapse of 2008/09. In: The Econometric Society, North American Summer Meeting, Washington University, St. Louis, 9-12 Jun 2011 (Unpublished)
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Abstract
The recent global economic crisis has been characterized by sharp declines in economic output. However, the accompanying declines in international trade were even sharper, in some cases up to 50 percent. Standard models of international macroeconomics and international trade fail to account for the severity of the trade collapse.
In this paper, we attempt to explain why international trade is so volatile in response to economic shocks. On the theoretical side, we combine the uncertainty shock approach by Bloom (2009) with a model of international trade. Bloom’s (2009) real-options approach is motivated by high-profile events that trigger an increase in uncertainty about the future path of the economy, for example the 9/11 terrorist attacks or the collapse of Lehman Brothers. In the wake of such events, firms adopt a ‘wait-and-see’ approach, slowing down their hiring and investment activities. Bloom (2009) shows that large uncertainty shocks typically lead to sharp recessions. Once the degree of uncertainty subsides, firms revert to their normal hiring and investment patterns and the economy recovers.
| Item Type: | Conference Item (Paper) | ||||
|---|---|---|---|---|---|
| Subjects: | H Social Sciences > HB Economic Theory H Social Sciences > HC Economic History and Conditions |
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| Divisions: | Faculty of Social Sciences > Economics | ||||
| Official Date: | 10 June 2011 | ||||
| Dates: |
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| Status: | Not Peer Reviewed | ||||
| Publication Status: | Unpublished | ||||
| Version or Related Resource: | Novy, Dennis and Taylor, Alan M. (2011). Why is trade so volatile? The great trade collapse of 2008/09. Latin American and Caribbean Economic Association (LACEA) & Latin American Meeting of the Econometric Society (LAMES) Meetings. Santiago, Chile, 10-12 Nov 2011. | ||||
| Conference Paper Type: | Paper | ||||
| Title of Event: | The Econometric Society, North American Summer Meeting | ||||
| Type of Event: | Conference | ||||
| Location of Event: | Washington University, St. Louis | ||||
| Date(s) of Event: | 9-12 Jun 2011 |
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