Are Trade Linkages Important Determinants of Country Vulnerability to Crises?

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Abstract
This chapter explores the significance of trade channels in the international propagation of financial crises. It describes how trade linkages impacted a country's stock market returns during recent crises. The importance of trade linkages depends on how a country responds to the initial crisis. Then, it analyzes whether three trade channels (competitiveness, income, and cheap-import effects) are important determinants of a country's vulnerability to recent financial crises. The trade linkages, financial linkages, and changes in investor sentiment are the factors affecting a country's stock market returns. Furthermore, it is noted that the way a country responds to a crisis is an important determinant of how that crisis affects other economies. By revealing the different channels through which trade works and by making the point that the way the crisis is handled has implications for how it propagates, it gives a better understanding of the crises compared to previously published papers.

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