Trade and Global Economic Shocks: A Network Perspective

Michigan State University, East Lansing MI

Investigators

Abstract

Fluctuations in economic growth in foreign countries affect the U.S. economy primarily through trade; this issue will become increasingly important as US trade with emerging markets, which tend to be volatile, increases. This research project will study how fluctuations in economic activities in emerging economies affect total economic activity, employment, incomes, and distribution of income in the United States. The focus of this research is on demand shocks from emerging economies, and the mechanisms through which these demand changes in emerging countries affect economic activities in the US. Previous studies of the effects of economic fluctuations in foreign countries on the US have focused on supply side; this is one of the few studies that focuses on fluctuations in demand in emerging economies. As the US’s share of trade with emerging economies increase, fluctuations in economic activities in other countries will increasingly become important in US economic outcomes. Th results of this research can help the US better manage its international economic relationships. This research project will use a network based framework to investigate the business cycle effects of demand shocks in emerging economies on the US economy and the mechanisms through which these effects occur. The model is an extension of Charney’s (2014) trade model to explain growth at the intensive margin. The main innovation is to introduction of trade growth in order to provide much richer insights into how economic fluctuations in the US may be driven by trade and growth dynamics. The model is estimated using data from sector-level input output tables, World Input-Output Database, firm level trade data and product level aggregate trade data. The possibility of US business cycles emanating from demand shocks in emerging economies will become important in the future as the share of US trade with these countries increases. The results of this research can help the US better manage its international economic relationships. This award reflects NSF's statutory mission and has been deemed worthy of support through evaluation using the Foundation's intellectual merit and broader impacts review criteria.