Financial Development and International Trade

Abstract

-------------------------------------This paper studies the extent to which frictions in financial markets affect aggregate trade flows. I study a model of firm dynamics with financial frictions and international trade, calibrated to match key features of firm-level data. I find that, while financial frictions have a large effect on the pattern and extent of international trade at the industry-level, as documented in the literature, they have a small effect on trade at the aggregate-level. Relaxing the financial constraints allows more firms to finance the upfront export entry costs, with a significant impact on industry-level trade flows to the extent that the industry is small enough to affect equilibrium prices. In contrast, removing the financial constraints at the aggregate-level leads to an increase in the wage and interest rate, thereby reducing the returns to becoming an exporter, with a small impact on aggregate trade flows. I also find that the cross-industry response of international trade to financial development is quantitatively consistent with industry-level evidence on the extent of trade across countries, and that the effectiveness of policies aimed at increasing trade by easing the access to credit for exporters is limited if implemented at an economy-wide scale.--

Dissecting the Effect of Credit Supply on Trade: Evidence from Matched Credit-Export Data

“…Our results are not consistent with models in which credit is used to pay only the entry or fixed cost of exporting, as in Chaney (2005) and Caggese and Cuñat (2012), or the fixed capital investment, as in Brooks and Dovis (2012) and Leibovici (2013). In those models, credit shocks affect the entry decision but not the intensive margin of exports.…”

Financial Frictions and New Exporter Dynamics

“…Recent quantitative studies by Caggese and Cunat (), Brooks and Dovis (), and Leibovici () have used a trade model to examine the aggregate implications of financial frictions for international trade. The former two focus on the impact of financial frictions on the gains from trade liberalization, whereas the latter studies the industry‐ and aggregate‐level implications of financial development on international trade.…”

Trade Adjusts Gradually After Trade Liberalization

“…Our model extends the frameworks developed in earlier papers (Kohn et al, 2016, andLeibovici, 2015) and is related to quantitative work that explores the connection between exchange rate regimes and financial distress in economies with credit constraints (see Céspedes et al, 2004, Devereux et al, 2006, and Gertler et al, 2007. More broadly, our work contributes to a growing theoretical and quantitative literature that studies the effects of financial frictions on export decisions, such as Chaney (2016), Caggese and Cunat (2013), Manova (2013), Kohn et al (2016), and Leibovici (2015).…”

“…More broadly, our work contributes to a growing theoretical and quantitative literature that studies the effects of financial frictions on export decisions, such as Chaney (2016), Caggese and Cunat (2013), Manova (2013), Kohn et al (2016), and Leibovici (2015). In contrast to previous studies, we study the transitional dynamics of a general equilibrium model with heterogeneous firms subject to credit constraints and balance-sheet effects.…”