Working Paper: CEPR ID: DP13375
Authors: Christian Keuschnigg; Michael Kogler
Abstract: Trade and innovation cause structural change. Productive factors must flow from declining to growing industries. Banks play a major role in cutting credit to non-viable firms in downsizing sectors and in providing new credit to finance investment in expanding, innovative sectors. Structural parameters of a country's banking system thus influence comparative advantage and trade, and can magnify the gains from trade liberalization. The analysis shows how insolvency laws, minimum capital standards, and cost of bank equity determine credit reallocation, sectoral expansion and trade patterns.
Keywords: capital reallocation; banking; trade; comparative advantage
JEL Codes: F10; G21; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Bank regulation with higher capital standards (G28) | Credit reallocation (E51) |
| Institutional reforms (O17) | Credit reallocation (E51) |
| Trade liberalization (F13) | Domestic producer prices in innovative sector (O39) |