Trade and the propagation of global shocks

Abstract

We study the diffusion of shocks across countries. We develop an intertemporal model of the international economy, where tradable intermediate goods are used in the production of non-tradable consumption and investment goods. International prices are endogenous, and their response to shocks triggers propagation across countries and industries. Each nation is affected differently depending on preferences, technology and endowment, which determine its comparative advantages. We use our calibrated model to perform counterfactual exercises reproducing some recent key world events. Shocks that have relatively minor aggregate effects in global output are found to impact countries and industries significantly and in opposite directions.