Intersectoral shocks require resource reallocation across sectors while intrasectoral shocks require resource reallocation within sectors. A crucial difference between these shocks is that the former require much higher adjustment costs than the latter. Using accounting data to calculate returns on capital in manufacturing industries, I generate proxies for these shocks. I find that the magnitude of intrasectoral shocks is much greater than that of intersectoral shocks but intersectoral shocks explain the aggregate unemployment rate better than intrasectoral shocks. I also find that intersectoral shocks are more closely related to the unemployment rate in the later part of the sample considered.

Although the global financial crisis of 2008 took root in advanced economies, its shocks spread through emerging economies, reflecting the increasingly interconnected global financial system. In this paper, we test the contagion effect at the country level using bilateral data on bank claims between countries. Direct and indirect exposures of emerging economies to crisis countries are empirically measured by using bilateral foreign claims from the Bank for International Settlements, and whether these exposures matter for capital outflows from emerging economies is tested. The findings show that emerging market economies more exposed to banks in the crisis-affected countries, both directly and/or indirectly, suffered more capital outflows during the global financial crisis. We also find that an emerging economy’s financial vulnerability can be influenced by its region’s overall exposure to crisis countries, indicating contagion effects at the regional level. Evidence also suggests that same-region lenders exhibited more favorable behavior toward the regional borrowers during the crisis, with important policy implications.

A severe economic downturn brought on by the COVID-19 pandemic, combined with high debt levels globally, raises the specter of mounting nonperforming loans (NPLs) in global banking systems. This paper investigates the impact of higher NPL ratios on the availability of bank credit among international lenders and emerging market borrowers. The paper finds that a rise in NPL ratios in both lender and borrower countries is positively associated with higher banking outflows from emerging market economies. Two additional features emerge in the patterns of cross-border banking flows when NPL ratios rise that are related to international credit market imperfections. First, lenders are more responsive to a rise in NPL ratios of same-region borrowers. This is consistent with the “reversion to the mean’’ effect given their generally high exposures to the same-region borrowers. Second, while a high share of US-dollar-denominated debt is generally positively associated with withdrawals of funds from emerging market borrowers, lenders are less responsive to a rise in NPL ratios in emerging market economies if their liabilities are denominated more in US dollars. The results are in line with the “original sin redux” hypothesis.

Caballero (1991) shows that a larger uncertainty only increases the investment of a perfectly competitive firm with a constant returns to scale technology. We show, however, that the option value generated by a one-time fixed cost can cause the increasing uncertainty to reduce investment from a positive value to zero. (This abstract was borrowed from another version of this item.)