PA974-001Policy Responses to the Great RecessionLecture 26 (12/3/09)Instructor: Menzie ChinnFall 2009FreundSo crises moderate trade imbalances; crises areLevchenko, Lewis, Tesar,Bems, Johnson, YiBems, Johnson, YiNotes: Asymmetric shock to mfg., equiv. to 1% aggregate demand shockIn US, or in EU. Based on Johnson-Noguera (2009) indicesAltomonte and OttavaniaMora and PowersJacks, Meissner, NovyFrictionless world, t = 1Closed, xijxji=0EvenettBaldwin and TaglioniImplicationsThe old Keynesian world . where my imports depend on my GDP and my exports depend upon your GDP is gone. Much of the world’s imports are intermediate inputs into exports, so foreign demand . especially in the great buyer markets (US and EU) determine many nations’ imports and exports. This has several implications for macroeconomic transmission.Since Keynesian aggregate demand depends on net exports, the simultaneous collapse in nations’ imports and exports had much less impact on aggregate demand than the nominal figures might suggest to an economist with the old Keynesian model in mind. In the old Keynesian world, the fall in Japan’s exports by 60% would have been considered catastrophic. In today’s world, the sharp export fall causes a sharp import fall not via incomes and budget constraints, but via the input-output
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