International Supply Chains as Real Transmission Channels of Financial Shocks

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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.