How Do Banking Crises Affect Bilateral Exports?

How Do Banking Crises Affect Bilateral Exports?

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This paper investigates whether banking crises are associated with declines in bilateral exports. We first develop a simple open economy model in which banking crises translate into negative liquidity shocks, leading to collapses in exports through supply-side and demand-side shocks. We then estimate a gravity model using a sample of developed and developing countries over the period 1988-2010. The results suggest that crisis-hit countries experience lower levels of bilateral exports, particularly in developing countries where supply-side shocks are found to be relatively more important than demand shocks. In developing countries, exports of manufactured goods are disproportionately hurt by banking crises and this negative effect is stronger in industries relying more on external finance. These findings are robust to correcting for potential endogeneity, to changes in the sample, and to alternative estimation methods.
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Contents

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Page

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I Introduction

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II Empirical Literature

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III Banking Crises, Liquidity Shocks, and Trade Flows: A Simple Model
A Model Setup
1 Households
2 Firms
B Autarky Equilibrium
C Trade Equilibrium

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IV Empirical Strategy
A Econometric Approach
B Data

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V Main Results
A Banking Crises and Bilateral Exports
B Differences in Resilience Across Countries and Regions
C Emphasizing the Role of Institutions
D Cross-Sectoral Differences in Resilience in Developing Countries
E Cross-Industry Differences in Resilience

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VI Robustness Checks
A Controlling for Endogeneity
B Controlling for Outliers
C Sensitivity to the Number of Importers

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VII Concluding Remarks

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References

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Appendices

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Tables
1 Correlation Between Bilateral Exports and Banking Crises
2 The Effect of Banking Crises on Bilateral Exports
3 Differences in Resilience Across Countries and Regions
4 Crises and Bilateral Exports: The Role of Institutional Quality
5 Crises and Bilateral Exports: Cross-Sectoral Differences in Resilience
6 Crises and Bilateral Exports: Cross-Industry Differences in Resilience
7 Crises and Bilateral Exports: Dealing with Endogeneity
8 Source and Definition of the Variables
9 Financial Dependence Across Industries
10 Summary Statistics for the Main Variables
11 Results of the Probit Regression to Generate Inverse Mills Ratio
12 Crises and Bilateral Exports: Using the System GMM Estimator
13 Crises and Bilateral Exports: Excluding Potential Influential Observations
14 Crises and Bilateral Exports: Sensitivity to the Number of Importers

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Figures
1 Number of Countries Experiencing a Banking Crisis (Starting Date)
2 Evolution of the Effects of Banking Crises on Bilateral Exports in 1988-2010: Annual Estimates

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