Exposure to International Crises: Trade vs Financial Contagion

I identify new patterns in country growth rates during the late 2000s based on proximity to the US subprime mortgage and Eurozone debt crises through distance, trade, and finance. I use a model of firm and sovereign default with international trade to study international crisis transmission. I model two transmission channels that can be shocked separately: cross-country trade and finance. I calibrate the model to the experiences of representative countries near and far from the crisis areas. Using these calibrations, disturbances on the order of those observed during the late 2000s are applied to each channel separately to study transmission through them. The model produces output declines brought on by contagion similar to those actually observed, without explicitly targeting them. The results support the observation of greater contagion for countries closer to the crisis areas and suggest credit disruption as the primary contagion driver, rather than the trade channel. Capital controls are found to be a useful tool for preventing similarly severe contagion in the future.