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WTO Working Papers

WTO working papers usually represent research in progress. Such research may be conducted in the preparation of WTO Secretariat reports, studies or other material for WTO members. The papers are circulated for comment because the WTO considers critical review of professional research to be extremely important.

English

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. 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.

English

Keywords: international supply chains, transmission channels of financial shock, Asian International Input-Output Tables, real linkages, monetary circuit
JEL: F23: International Economics / International Factor Movements and International Business / Multinational Firms; International Business; L16: Industrial Organization / Market Structure, Firm Strategy, and Market Performance / Industrial Organization and Macroeconomics: Industrial Structure and Structural Change; Industrial Price Indices; G01: Financial Economics / General / Financial Crises; F36: International Economics / International Finance / Financial Aspects of Economic Integration; C67: Mathematical and Quantitative Methods / Mathematical Methods; Programming Models; Mathematical and Simulation Modeling / Input-Output Models
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