Mary Amiti and David E. Weinstein*

The financial crisis of 2008-09 brought about one of the largest collapses in world trade since the end of World War II. Between the first quarter of 2008 and the first quarter of 2009, the value of real global GDP fell 4.6 percent while exports plummeted 17 percent, as can be seen in the chart below. The dramatic decline in world trade—a loss of $761 billion in nominal exports—came through two channels: decreased demand for imports and supply effects, most likely arising from financial constraints. In this post, we look at evidence that supply effects, including curtailed funding for export-related activities, played a key role in the trade collapse—and thus in the transmission of the financial crisis from Wall Street to “Main Street,” here and abroad.

Kenneth D. Garbade

The Federal Reserve announced on November 3, 2010, that in the interest of stimulating economic recovery, it would purchase $600 billion of longer-term Treasury securities. The announcement led some commentators to conjecture that the Fed’s large-scale asset purchase (LSAP) program—popularly known as “quantitative easing”—is more likely to trigger inflation than stimulate recovery. This post discusses why those concerns may be misplaced, and also why they are not without some basis. A recent Liberty Street Economics post by James J. McAndrews—“Will the Federal Reserve's Asset Purchases Lead to Higher Inflation?” addressed the same issue from a broader perspective and came to a substantially similar conclusion.