Financial Contagion on the International Trade Network

Financial Contagion on the International Trade Network
Raja Kali & Javier A. Reyes

I've posted about this paper before when the financial collapse was on fire. As before I quoted that the international trade system is affected more if a well-connected country is in crisis than if a less-connected country is. Conversely more well connected countries can absorb the shock better, probably because they transfer all that 'crisis' to others.

I found this paper incredibly interesting because it is one of the few papers that integrates network statistics, like centrality, into the statistical models of an outcome. I'm surprised that this is not done more often. The downside is that they don't do their analysis on a weighted network as they should. Instead they generate the network using various thresholds for link weight. This makes the analysis easier, but it also means they have like 28 statistical models testing for the significance of various thresholds. I found it interesting that trade with the 'epicenter country' (the country where a particular crisis occurred) wasn't terribly significant in predicting outcomes.

Overall network measures are very significant in predicting outcomes, even in the presence of other well-known control variables. It happens to explain even if a country's economy is small a crisis within can have large and lasting effects if it is well-connected. The end by suggesting that a network approach to financial shocks has important policy implications. They suggest further 'what-if' simulation using network models in the future since they are more important than previously considered.