Financial Crises and International Trade: The Long Way to Recovery

Abstract

Standard theoretical models would predict that a depreciation generates an increase in net exports. However, recent emerging market crises, accompanied by sharp exchange rate depreciations, have often been followed by a fall or a stagnation of exports. This paper provides a simple theoretical framework which shows that a currency crisis affects trade through (i) a competitiveness effect, i.e. a variation of relative prices, that influences positively the intensive margin of trade (the amount of export by firm); (ii) a balance-sheet effect, i.e. a modification of the fixed cost of export, that affects negatively the extensive margin of trade (the number of exporters). We derive from our model a gravity-like equation of bilateral sectoral trade. First, we find that these events have a long-lasting negative impact on exports- which remain below their natural level during five years. We present evidence suggesting that this persistent effect is due to the combination of firms ’ foreign currency borrowing and fixed costs of exports, which leads to important balance-sheet problems in the aftermath of the crisis. Second, the net effect of crises on exports largely depends on countries’ specialization: the positive competitiveness effect is magnified by a specialization in high elasticity of substitution’s industries, while negative balance-sheets effects are exacerbated in industries more

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