Propagation of Export Shocks: The Great Recession in Japan

This study analyzes the Japanese economy during the Great Recession period (2007-2009). The Japanese GDP declined considerably during this period, despite little exposure to the US housing market, and exports declined significantly. Motivated by this fact, we construct a multi-sector, multi-region, and small open economy model. Each region has a representative consumer, and regions and sectors are linked through input-output linkages and consumers’ final demand. We measure the export shocks in each region using trade statistics. Using our model, we quantitatively evaluate how the decline in export demand propagates throughout the country. We find that export shocks account for a significant portion of the GDP decline in many regions. To inspect the mechanism, we conduct counterfactual exercises in which the change in GDP is decomposed within and across regions, as well as within and across sectors.