Direct and Indirect Crisis Effects on International Trade or: Is There a Chance to Employ an Income Stimulus to Stimulate Exports?

Abstract

While research concerning the fundamental connection between financial crises and international trade, at first appearance, provides conclusive results, it displays two specific methodological biases by ignoring income effects: first, crisis influence is underestimated; second, crisis dynamics do not take account of income dynamics, thereby giving the analysis a touch of avoidable incompleteness. This paper offers a solution to both problems without leaving the standard framework of the gravity model of trade. The solution is brought by a basic crisis adjustment technique of income. As an empirical test, the developed approach is employed to estimate the crisis response of German trade during the recent global crisis. Results correspond to consequences deducted from an elementary impact model for a quasi-non-crisis country: exports are mainly affected by non-income effects and foreign income effects; imports are influenced by domestic income and global non-income effects, and reveal expected dynamics. The outcome has two implications of interest for policy decisions: (i) stimulus spillovers can come back, and (ii) the indirect effect sensitivity of imports delivers a strong case for an international coordination of fiscal measures.gravity model of trade; German trade; crisis impact; income effects; stimulus effects