Revisiting the ‘great trade collapse’ with the endogenous input-choice model

We revisit the role of vertical specialization and supply constraints during the ‘great trade collapse’ with new data and a new model that allows us to resolve some of the conceptual and data limitations faced by previous studies. We find that (i) demand factors explain a smaller (than previously understood) fraction of the collapse in trade during 2008–9; and (ii) models tend to over-estimate (or under-estimate) the decline in the demand for domestic (or imported) inputs. These model errors are equivalent to an increase of about 4% in the export price premium, on average.