Arnold Kiling writes on the macroeconomic consquences of of Japan in both the AS-AD framework and the PSST framework

Outside the affected region, the rest of the world experiences no supply shock. Assuming that the affected region exports less and imports more, this raises aggregate demand in the rest of the world. Output goes up in the rest of the world.

The PSST paradigm would look at the situation differently. The disaster would disrupt patterns of trade, both inside the region and outside. The disruption would be larger inside the region. However, the effects would be adverse both inside the affected region and outside of it. In the rest of the world, relative to a no-disaster scenario, output would be lower rather than higher.

So this is not quite right. Most of us would think of the loss of a trading partner as a aggregate supply shock. Especially since we are so found of equating trade and technological change.

If China disappears tomorrow does that have no effect on the supply side in the US? What about Saudi Arabia?

In addition interconnected global market mean that what happens in Japan can cause a demand shock as well. Many of the buyers of US products are Japanese and many of the holders of US securities are Japanese.

I don’t think the two paradigms are so easily divisible on this issue.

Arnold may disagree but I still think the key difference must revolve around what happens when the money supply increases. Otherwise I think we are more or less in aggreement.

If you think trade collapses are new sustainable patterns are established then money can only distort. If you think trade collapses as because of hoarders than money can help.

Yet, the fact that trade and specialization are the beating heart of economics is accepting by both schools.

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