Distance and the impact of ‘gravity’ help explain patterns of international trade

United States trade with other countries declined dramatically during the recent recession, with the volumes of imports and exports each falling about 21 percent from third quarter 2008 to second quarter 2009. By comparison, real gross domestic product (GDP) contracted only 4 percent (Chart 1). A subsequent rebound in international trade flows is just as striking and has been one of the most robust indicators during the accelerating recovery.International trade ; Business cycles

Ties that bind: bilateral trade's role in synchronizing business cycles

For most of the past year, economies in all parts of the world have been weakening--from outright recessions in the U.S. and parts of Europe to sharply slower growth in China, India and other emerging economies. The pattern provides the latest example of international business-cycle synchronization--the tendency for countries to experience macroeconomic fluctuations of similar timing and magnitude. ; While today's synchronization isn't unusual, it raises questions about the forces that transmit economic fluctuations from one country to another. An important factor to consider is international trade. Over long periods of time, countries with deeper trade ties are more closely synchronized. This occurs even though trade with any particular partner makes up a fairly small part of economic activity in most countries.International trade ; Business cycles

Sovereign debt: a matter of willingness, not ability, to pay

Greece, which shook international markets with the disclosure of its deep indebtedness, has struggled recently to borrow money. Among European governments, Ireland, Italy, Portugal and Spain have also had difficulty selling bonds. Even though these governments probably have assets that exceed their debts, investors worry about the risk of default. This belief stems in part from the nature of sovereign debt. Governments aren't subject to formal bankruptcy regulations, leaving investors few legal rights over borrower assets, even if they could be liquidated. Consequently, the likelihood of default is not strictly determined by measures of solvency or asset liquidity. Rather, it's a matter of the political willingness to repay creditors. A perceived high likelihood of default increases interest rates on the new debt necessary to finance deficits and payments on outstanding obligations. ; What is an effective response to such debt crises? European policymakers have announced various aid measures--for example, loans at below-market interest rates--for Greece and other troubled governments. With high debts and deficits, these governments must continue borrowing to fund expenses and make debt payments; wide interest rate spreads make that difficult. Policies such as subsidized loans make governments feel richer and thus more willing to pay debt service than face the costs of default. More generally, policy measures aimed at preventing sovereign default ultimately need to raise incentives to repay debt, either by making the payment of debt less costly or by raising default costs.Debts, Public ; Budget deficits ; Interest rates ; Default (Finance) ; Greece

Vertical specialization and international business cycle synchronization

We explore the impact of vertical specialization—trade in goods across multiple stages of production—on the relationship between trade and international business cycle synchronization. We develop a model in which the degree of vertical specialization is endogenously determined by comparative advantage across heterogeneous goods and varies with trade barriers between countries. We show analytically that fluctuations in measured productivity in our model are not linked across countries through trade, despite the greater transmission of technology shocks implied by higher degrees of vertical specialization. In numerical simulations, we find this transmission is insufficient in generating substantial dependence of business cycle synchronization on trade intensity.Business cycles ; International trade

Default and the maturity structure in sovereign bonds

This paper studies the maturity composition and the term structure of interest rate spreads of government debt in emerging markets. We document that in Argentina, Brazil, Mexico, and Russia, when interest rate spreads rise, debt maturity shortens and the spread on short-term bonds is higher than on long-term bonds. To account for this pattern, we build a dynamic model of international borrowing with endogenous default and multiple maturities of debt. Short-term debt can deliver higher immediate consumption than long-term debt; large longterm loans are not available because the borrower cannot commit to save in the near future towards repayment in the far future.> ; However, issuing long-term debt can insure against the need to roll-over short-term debt at high interest rate spreads. The trade-off between these two benefits is quantitatively important for understanding the maturity composition in emerging markets. When calibrated to data from Brazil, the model matches the dynamics in the maturity of debt issuances and its comovement with the level of spreads across maturities.Bonds ; Debt ; Default (Finance) ; Emerging markets ; International finance

Default and the maturity structure in sovereign bonds

This paper studies the maturity composition and the term structure of interest rate spreads of government debt in emerging markets. In the data, when interest rate spreads rise, debt maturity shortens and the spread on short-term bonds is higher than on long-term bonds. To account for this pattern, we build a dynamic model of international borrowing with endogenous default and multiple maturities of debt. Short-term debt can deliver higher immediate consumption than long-term debt; large long-term loans are not available because the borrower cannot commit to save in the near future towards repayment in the far future. However, issuing long-term debt can insure against the need to roll-over short-term debt at high interest rate spreads. The trade-off between these two benefits is quantitatively important for understanding the maturity composition in emerging markets. When calibrated to data from Brazil, the model matches the dynamics in the maturity of debt issuances and its comovement with the level of spreads across maturities.Bonds ; Debt ; Default (Finance)

2017-1 International Risk Sharing with Endogenously Segmented Asset Markets

Asset price data imply a large degree of international risk sharing, while aggregate consumption data do not. We evaluate whether a model with trade in goods and endogenously segmented asset markets accounts for this puzzling discrepancy. Active households pay a fixed cost to transfer income into or out of assets. These households share risk within and across countries, and their marginal utility growth prices assets, so asset prices imply high international risk sharing. Inactive households consume current income and do not share risk, so aggregate consumption (which averages across all households) re.ects lower risk sharing. Trade in goods is essential for generating these differences in the asset price-based and the consumption-based measures of risk sharing. Indeed, without trade, consumption is constrained by domestic resources and there is no international risk sharing. The calibrated model predicts risk sharing measures in line with data, and also partly resolves the Backus-Smith-Kollmann puzzle