Abstract:

This study analyzes the Japanese economy during the Great Recession period (2007-2009). The Japanese GDP dropped significantly during this period, despite limited exposure to the US housing market, and exports also declined sharply. Motivated by this fact, we construct a multi-sector, multi-region small open economy model. Each region has a representative consumer, and regions and sectors are linked through inter-regional input-output tables and consumers’ final demand. We measure the export shocks in each region-sector 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 we examine the change in GDP resulting from an export shock in a specific industry-region. The propagation is decomposed within and across regions, as well as within and across sectors.