This sounds more like the Renaissance than it does Medieval times, because money wasn't as common as fantasy makes it out to be. Most fantasy worlds are more Renaissance in nature than solidly Medieval because coin was far more common.
You'll want to look at this article and this one which covers late Medieval to Early Renaissance
There actually was a depression in the late 1300s. There were a lot of factors that played into it, extreme taxation destroying the Champagne Fairs, the Black Plague, wars and so forth.
Government response to changing economics is important.
The longest-lasting ill effect from the Black Death was the response
of the English Crown in imposing permanent maximum wage control and
compulsory labor rationing upon English society. The sudden decline of
population and consequent doubling of wage rates was met by the
government's severe imposition of maximum wage control in the
Ordinance of 1349 and the Statue of Labourers of 1351. Maximum wage
control was established at the behest of the employing classes: large,
middle, and small landlords, and master craftsmen, the former groups
in particular alarmed at the rise of agricultural wage rates. The
ordinance and the statute defied economic law by attempting to enforce
maximum wage control at the old pre-plague levels. The inevitable
result, however, was a grave shortage of labor, since at the statutory
maximum wage the demand for labor was enormously greater than the
newly scarce supply.
Every government intervention creates new problems in the course of
vain attempts to solve the old. The government is then confronted with
the choice: pile on new interventions to solve the inexplicable new
problems, or repeal the original intervention. Government's instinct,
of course, is to maximize its wealth and power by adding new
interventions. So did the English Statute of Labourers — which imposed
forced labor at the old wage rates for all men in England under the
age of 60, restricted the mobility of labor, declaring that the lord
of a particular territory had first claim on a man's labor, and made
it a criminal offence for an employer to hire a worker who had left a
former master. In that way, the English government engaged in labor
rationing to try to freeze laborers at their pre-plague occupations at
This forced rationing of labor cut against the natural inclination of
men to leave for more employment at better wages, and so the
inevitable rise of black markets for labor made enforcement of the
statutes difficult. The desperate English Crown tried once again, in
the Cambridge Statute of 1388, to make the rationing more rigorous.
Labor mobility of any sort was prohibited without written permission
from local justices, and compulsory child labor was imposed in
agriculture. But there was continual evasion of this compulsory
buyers' cartel, especially by large employers, who were particularly
eager and able to pay higher wage rates. The cumbersome English
judicial machinery was totally ineffective in enforcing the
legislation, although the monopolistic urban guilds (monopolies
enforced by government) were able to partially enforce wage control in
So it looks like you've got "increased bandits" and lots of monsters as the CAUSE of the lack in trade. But this might actually be an effect.
The question you might want to ask is WHY are both of these true? Why are more people turning to banditry? And how are they making any money if there's not any people passing through?
Why are there more monsters? Why aren't the monsters eating the bandits?
And lastly, why aren't the merchants and governments doing anything about it?
If an area is isolated, then local trade will abound. If there's money to be made exporting goods, then the cost of getting them to other places will be factored in. Trade guilds will band together--in this time and during the Renaissance towns and trade guilds did get private security to patrol and wipe out bandits.
If a trade route is abandoned because of bandits, then the bandits will no longer live in the area. They will move on or starve.
What you actually need is a disaster before this, something like the Plague that pushes populations down enough that they can't even harvest (because there aren't enough people). It would follow that there would be less people to kill monsters. You might even have something that targeted adventurers, which in the past had served to keep both bandits and monsters in check. With a smaller population of adventurers, they'd be in high demand and people might even do their best to get them to stay in an area to take care of problems. (Giving them free stuff and all once they prove themselves, like room and board.)
Other countries that don't get goods in from the bandit-ridden country, well, this depends. If the other country is known for their fabric and they can't get the raw goods from bandit-country, then they will look for supply elsewhere. If they can't, yes, the town might disappear.
It's going to be specific to needs, and would not happen often.
Now, after the Black Plague, many tiny communities DID disappear. But these were groupings of maybe 20 houses or less. Anything on any trade route pretty much stayed.