International Supply Chains as Real Transmission Channels of Financial Shocks

Capco Institute Journal of Financial Transformation, Vol. 31, pp. 83-97, March 2011

17 Pages Posted: 25 Nov 2011

See all articles by Hubert Escaith

Hubert Escaith

Independent; World Trade Organization (WTO)

Fabien Gonguet

Ecole Polytechnique, Paris

Date Written: March 24, 2011

Abstract

The article analyzes the role of international supply chains as transmission channels of a financial shock. In these production networks, individual firms rely on each other, either as supplier of intermediate goods or client for their own production. An exogenous financial shock affecting a single firm, such as the termination of a line of credit, reverberates through the productive chain, with potential disruption effects. A resonance effect amplifies the back and forth interaction between real and monetary circuits when banks operate at the limit of their institutional capacity, defined by the capital adequacy ratio, and their assets are priced to market. The transmission of the initial financial shock through real channels is tracked by modeling supply-driven international input-output interactions. The paper applies the proposed methodology on an illustrative set of interconnected economies: the U.S. and nine developed and developing Asian countries.

Keywords: international trade, supply chains, monetary circuit, real linkages, transmission channels of financial shock, International Input-Output Tables

JEL Classification: C67, F23, F36, G01, L16

Suggested Citation

Escaith, Hubert and Gonguet, Fabien, International Supply Chains as Real Transmission Channels of Financial Shocks (March 24, 2011). Capco Institute Journal of Financial Transformation, Vol. 31, pp. 83-97, March 2011, Available at SSRN: https://ssrn.com/abstract=1964360

World Trade Organization (WTO) ( email )

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Fabien Gonguet

Ecole Polytechnique, Paris ( email )

1 rue Descartes
Paris, 75005
France

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