Credit market frictions and trade liberalizations

Brooks, Wyatt; Dovis, Alessandro

doi:10.1016/j.jmoneco.2019.01.013

Cited by 45 publications

(24 citation statements)

References 26 publications

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“…Under fixed effects, financial development had a non-significant positive effect on foreign trade, while random effects showed a significant positive relationship running from financial development towards foreign trade in transitional economies. The findings support the argument by Kumarasamy and Singh (2018) and Brooks and Dovis (2019). By contrast, pooled OLS showed that foreign trade was negatively but significantly affected by financial development, a finding which resonates with Yakubu et al (2018).…”

Section: Ft=f (Fin Hcd Fdi Growth Infr)supporting

confidence: 85%

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Does Financial Development Enhance Foreign Trade in Selected Transitional Economies?

Tsaurai

Hlupo

2020

CER

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The study investigates the influence of financial development on foreign trade in transitional economies using panel data (1994–2014). Although empirical studies on the impact of financial development on foreign trade are available, none of them that the authors are aware of attempted to explore the subject matter in the context of transitional economies. None attempted to investigate if human capital development is a channel through which financial development influences foreign trade or international trade. Under fixed effects, financial development was found to have a non‑significant positive influence on foreign trade, while the random effects approach shows a significant positive relationship running from financial development towards foreign trade. The findings resonate with the majority of the literature on the subject. However, pooled ordinary least squares (OLS) shows that financial development had a significant negative influence on foreign trade. Under both fixed and random effects, human capital development was found to be a channel through which financial development had a significant positive effect on foreign trade. The results are in line with Patrick’s (1966) argument that foreign trade is quickened by high levels of human capital and financial development. The implication of the study is that transitional authorities should develop and implement human capital development enhancement policies in order to enable financial development to have a significant positive effect on foreign trade. In contrast to the available literature, human capital development was found to have had a significant negative impact on foreign trade under the OLS approach. Future studies on the subject matter should address the endogeneity concerns and the dynamic characteristics of the foreign trade data.

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Section: Ft=f (Fin Hcd Fdi Growth Infr)supporting

confidence: 85%

“…Their results also suggest that credit constraints have a larger negative impact on firms in the technology sector, which rely more on external finance. More support on the effect of credit constraints on trade is found in the works of Brooks and Dovis (2019).…”

Section: The Effect Of Financial Development On Foreign Trade - the Ementioning

confidence: 95%

Does Financial Development Enhance Foreign Trade in Selected Transitional Economies?

Tsaurai

Hlupo

2020

CER

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“…Relying on a general equilibrium framework, we are more interested in how trade affects mark-ups and, through this channel, the borrowing conditions of smaller (and not necessarily export-oriented) firms. 3 The use of a general-equilibrium model with profit-dependent borrowing limits connects our work to a recent paper by Brooks and Dovis (2018). They show (in a model with constant markups, CRS-technology, and exogenous productivity) that the way credit constraints are modeled matters for the extent to which liberalization produces gains from trade; however, they do not address how the pro-competitive effects of trade -by reducing the borrowing capacity of smaller firms -may harm firm-level productivity.…”

Section: Introductionsupporting

confidence: 61%

“…So a fall in τ reduces the ratio of the highest to the lowest price, τ 2 (σ − 1)/σ, an implication that tends to induce individuals to consume a more balanced goods basket (equation 4). 15 As a result, the variation in the marginal utility of consumption across goods tends to fall and the welfare of the average individual (i.e., aggregate real output, Y /P ) tends to rise. Note, however, that we cannot exclude that price dispersion increases locally: When τ falls, prices charged by credit-constrained firms will increase (as long as they are below the limit price τ ).…”

Section: The Impact Of Lower Trade Costs On Real Outputmentioning

confidence: 99%

Harmful Procompetitive Effects of Trade in Presence of Credit Market Frictions

Foellmi¹,

Oechslin²

2019

J of Money Credit Banking

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We explore the consequences of international trade in an economy that encompasses technology choice and an endogenous distribution of markups due to credit market frictions. We show that in such an environment a gradual opening of trade may-but not necessarily must-have a negative impact on productivity and overall output. The reason is that the pro-competitive effects of trade reduce markups and hence make access to credit more difficult for smaller firms. As a result, smaller firms-while not driven out of the market-may be forced to switch to less productive technologies.

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“…We document that, following a reduction in import tariffs on capital and intermediate inputs, financially underdeveloped economies grow substantially slower than financially developed ones. Credit market frictions, a salient feature of developing economies, might limit the degree to which firms adjust their production in response to lower prices of imported physical capital and intermediates, thereby reducing the gains from trade liberalization in these economies (Manova 2010;Caggese and Cunat 2013;Brooks and Dovis 2019).…”

Section: Introductionmentioning

confidence: 99%

No Credit, No Gain: Trade Liberalization Dynamics, Production Inputs, and Financial Development

Kohn¹,

Leibovici²,

Szkup³

2020

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We study the role of financial development on the aggregate and welfare implications of reducing trade barriers on imports of physical capital and intermediate inputs. We document that financially underdeveloped economies feature a slower response of real GDP, consumption, and investment following trade liberalization episodes that improve access to imported production inputs. To quantify the role of financial development, we set up a quantitative general equilibrium model with heterogeneous firms subject to financial constraints and estimate it to match salient features from Colombian plantlevel data. We find that the adjustment to a decline of import tariffs on physical capital and intermediate inputs is significantly slower in financially underdeveloped economies in line with the empirical evidence. These effects reduce the welfare gains from trade liberalization and make them more unequal across agents.

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Credit market frictions and trade liberalizations

Cited by 45 publications

References 26 publications

Does Financial Development Enhance Foreign Trade in Selected Transitional Economies?

Does Financial Development Enhance Foreign Trade in Selected Transitional Economies?

Harmful Procompetitive Effects of Trade in Presence of Credit Market Frictions

No Credit, No Gain: Trade Liberalization Dynamics, Production Inputs, and Financial Development

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