Financial Choice in a Non-Ricardian Model of Trade

Abstract

Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. We join the new trade theory with a model of choice between bank and bond financing to show the differential effects of financial policy on the distribution of firm size, welfare, aggregate output, gains from trade, and the real exchange rate in a small open economy. Increasing bank efficiency and reducing bond transaction costs both increase welfare but have opposite effects on the extensive margin of trade, aggregate exports, and the real exchange rate. Increasing the degree of trade openness increases firms' relative demand for bond versus bank financing. We identify a financial switching channel for gains from trade where increasing access to export markets allows firms to overcome high fixed costs of bond issuance to secure a lower marginal cost of capital. Abstract We join the new trade theory with a model of choice between bank and bond financing to show the differential effects of financial policy on the distribution of firm size, welfare, aggregate output, gains from trade, and the real exchange rate in a small open economy. Increasing bank efficiency and reducing bond transaction costs both increase welfare but have opposite effects on the extensive margin of trade, aggregate exports, and the real exchange rate. Increasing the degree of trade openness increases firms' relative demand for bond versus bank financing. We identify a financial switching channel for gains from trade where increasing access to export markets allows firms to overcome high fixed costs of bond issuance to secure a lower marginal cost of capital.

Understanding Markups in the Open Economy

“…To illustrate the relationship between the micro and macro effects of relative cost shocks across countries, such as a small movement in the nominal exchange rate (see Burstein, Eichenbaum, and Rebelo (2005) for a discussion contrasting the impact of large versus small shocks on the real exchange rate), Table 1 lists the volatility of the terms of trade relative to the real exchange rate in U.S. data alongside results from simulated data for small cost shocks in our model. 20 We see in the table that the model delivers a variance in the terms of trade that is approximately one-half the variance of the real exchange rate when d = 1.5, between our lower-bound for trade costs of 1.25 from the survey by Russ and Valderrama (2010) and the higher value for trade costs (1.74) estimated by Anderson and van Wincoop (2004). This ratio of volatilities corresponds with the figure reported for the U.S. in Corsetti, Dedola, and Leduc (2008).…”

Credit Constraints, Heterogeneous Firms, and International Trade

“…1 Comparative statics based on Column 4 in Table2.2 2 All other results in the paper are also robust to including only one of the two interaction terms at a time.2 3 In unreported results, I have con…rmed that my …ndings are not driven by …nancially underdeveloped countries having systematically lower or higher real exchange rates. SeeRuss and Valderrama (2009) on the link between …nancial development and real exchange rates in general equilibrium.…”

Long-Run Drivers of Current Account Imbalances in the EU: The Role of Trade Openness

“…A higher openness induces exporters to be more profitable, which finally allows them to borrow cheaply. Russ and Valderrama (2009) demonstrate how an increased trade openness can induce a better access to financial markets so that for countries more open to trade a bigger credit sector is likely to be associated with higher current account surpluses.…”