Working Paper: CEPR ID: DP14792
Authors: Stefano Federico; Fadi Hassan; Veronica Rappoport
Abstract: This paper shows that there are endogenous financial constraints arising from trade liberalization. Banks with a large share of loans on firms exposed to competition from China suffer an increase in non-performing loans and reduce their credit capacity. The drop in credit supply affects both firms directly exposed to import-competition from China, and firm expected to expand upon trade liberalization, with economically relevant implications in terms of employment, investment, and output. This financial spillover between losers and winners from trade retards the reallocation of factors of production between firms and sectors, crucial to the welfare implication of trade liberalization.
Keywords: No keywords provided
JEL Codes: F61; F62; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Higher share of loans to firms exposed to competition from China (F65) | Increase in nonperforming loans (NPLs) (F65) |
| Increase in nonperforming loans (NPLs) (F65) | Reduction in credit supply (E51) |
| Higher share of loans to firms exposed to competition from China (F65) | Reduction in credit supply to firms (E51) |
| Reduction in credit supply (E51) | Reduction in employment (J63) |
| Reduction in credit supply (E51) | Reduction in investment (G31) |
| Financial spillover from banks (F65) | Resource reallocation across sectors (R38) |