1. Comments on Modelling the impact of the Global Financial Crisis on World Trade Warwick McKibbin and Andrew Stoekel Australian National University and the Brookings Institute
Discussant
Yongheng Deng
National University of Singapore
NBER 21st Annual East Asian Seminar on Economics
A Pacific Rim Perspective on the Financial Crisis
Sydney, Australia, June 25~26, 2010

2. Highlights of the paper
The 2008 financial crisis that was triggered by the meltdown of the subprime market in the US turned into a mega scale global downturn
World trade volumes were estimated to shrink by 13% in 2009
Developed an intertemporal general equilibrium model (The G-Cubed Model) to study the dynamic behavior of the impact of the global financial crisis
The model use 6 sectors and 15 countries/regions to capture 3 main shocks from the crisis and 3 policy responses
6 Sectors: Energy, mining, agriculture, manufacturing durables, manufacturing non-durables, services
15 countries/regions: US, Japan, UK, China, India…
3 shocks: Housing bubble and its burst, Equity risk, Household risk
3 policy responses: easing of monetary policy, fiscal policy, and rise in trade and financial protectionism

3. Highlights of the paper
Disentangle the many influences of the financial crisis
Simulate effects of US only crisis without a fiscal policy response
Simulate the global financial crisis (with contagious effects) without fiscal stimulus
Simulate the fiscal stimulus alone
Capture the impact of trade protectionism
Had there not been the contagion, the crisis effects would not have been as dramatic
Fiscal policy response initially has the desired effect of increasing domestic demand and hence real GDP, but there are also other effects going on that have an adverse effect
Rising trade protection – tariffs were to increase by 10 %, would lead to additional GDP falls by 1~2%, exports could fall by 5~10%
The crisis and the policy responses, both fiscal expansion and trade protection, all work to discourage exports

4. Challenges
The underlying macro economic relationship may subject to more careful scrutiny when apply to this crisis
E.g., corporations behavior during credit crunch, asymmetric liquidity effect during the down turn
It is challenging to tackle so many things within one model
E.g., Income shock (unemployment) has played a major role leading to the crash of the housing market and financial market, which eventually brought down the entire economy, but it is not modeled here
What is the relevant interest rates that should be modeled here

5. Federal Funds Rates
Source: US Federal Reserve Statistical Release

6. US Mortgage Interest Rates
Source: Freddie Mac

7. Challenges
The underlying macro economic relationship may subject to more careful scrutiny when apply to this crisis
E.g., corporations behavior during credit crunch, asymmetric liquidity effect during the down turn
It is challenging to tackle so many things within one model
E.g., Income shock (unemployment) has played a major role leading to the crash of the housing market and financial market, which eventually brought down the entire economy, but it is not modeled here
What is the relevant interest rates that should be modeled here
Institutional variations across countries in the model

8. Chinese government’s stimulus policy has achieved extraordinarily large and quick responses
Sources: National Bureau of Statistics, China; OECD; Ministry of Statistics and Programme Implementing, India.

9. Challenges
The underlying macro economic relationship may subject to more careful scrutiny when apply to this crisis
E.g., corporations behavior during credit crunch, asymmetric liquidity effect during the down turn
It is challenging to tackle so many things within one model
E.g., Income shock (unemployment) has played a major role leading to the crash of the housing market and financial market, which eventually brought down the entire economy, but it is not modeled here
What is the relevant interest rates that should be modeled here
Institutional variations across countries in the model
Cash-out refinance practice in the US market and its implications to the housing and wealth effect
Housing as a form of saving in China and its implication to the wealth effect
The impact of corporate governance and ownership structure to the behavior of economic response to the crisis and monetary and fiscal policies, e.g. central-SOEs phenomenon in China