| Abstract: |
In this paper we analyse the role of the international trade network for the
strength of the global recession across countries. The novelty of our paper is
the use of value-added trade data to capture the importance of trade network
structure. We estimate with BMA techniques how far network indicators
measuring interlinkages in terms of value added trade has explanatory power
both for the length and the depth of the recent crisis once we control for
pre-crisis macroeconomic fundamentals. Our main findings are that the
macroeconomic control variables with the strongest explanatory power for the
length and the depth of the crisis are the growth rates of credit and of the
real effective exchange rate in the pre-crisis period and, though to a lesser
extent, GDP and inflation growth over the same period and pre-crisis foreign
exchange reserves. Government debt, the GVC participation index and net
foreign assets have very little explanatory power in the BMA estimations. The
models’ performance increases when we introduce interaction terms of credit
growth with other vulnerability measures. The results demonstrate that the
coincidence of vulnerabilities matters a lot. Credit growth deepens the crisis
mainly if accompanied with pre-crisis GDP growth or low reserves, while the
crisis tends to be longer if credit growth has led to large leverage or the
accumulation of net foreign liabilities. Finally, we find evidence that value
added trade linkages have an impact on the severity of the crisis. While the
increasing connectivity or openness of the country makes the crisis longer,
the same characteristics of the neighbours makes it also deeper. The tendency
to interact with already connected countries lowers or increases the impact of
the crisis depending on the position of the country. Altogether we have mixed
results on the direct trade channel, but we demonstrate the importance of
network structure beyond the countries’ own openness. In addition, we are also
able to improve results by using gross value added instead of gross trade
data. JEL Classification: F14, C45, C52, C67 |