Chang Liu from the University of New South Wales will present "World Financial Cycles and Global Trade".

Abstract: We examine the effects of global trade shocks in the presence of external imbalances and incomplete international financial markets using a world general equilibrium framework. Our model features an advanced economy and a continuum of small open economies with sovereign default risk. Countries engage in international trade by importing intermediate goods and exporting final goods. Trade is endogenously unbalanced. When global trade costs increase, output declines across all countries, but the contraction is more severe for high-debt countries. This differential effect explains two salient features of world financial cycles: the concurrent decline in average spreads and their cross-sectional dispersion during the rapid trade-integration phase (2000–2007), and the subsequent rise in dispersion amid geoeconomic fragmentation (post-2016).