Working Paper: NBER ID: w14531
Authors: Kalina Manova
Abstract: This paper examines the detrimental consequences of financial market imperfections for international trade. I develop a heterogeneous-firm model with countries at different levels of financial development and sectors of varying financial vulnerability. Applying this model to aggregate trade data, I study the mechanisms through which credit constraints operate. First, financial development increases countries' exports above and beyond its impact on overall production. Firm selection into exporting accounts for a third of the trade-specific effect, while two thirds are due to reductions in firm-level exports. Second, financially advanced economies export a wider range of products and their exports experience less product turnover. Finally, while all countries service large destinations, exporters with superior financial institutions have more trading partners and also enter smaller markets. All of these effects are magnified in financially vulnerable sectors. These results have important policy implications for less developed economies that rely on exports for economic growth but suffer from poor financial contractibility.
Keywords: Credit Constraints; International Trade; Heterogeneous Firms; Financial Development
JEL Codes: F10; F14; F36; G20; G28; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Financial development (O16) | Exports (F10) |
| Credit constraints (E51) | Firm selection into exporting (F23) |
| Financial development (O16) | Range of products exported (F10) |
| Financially advanced economies (F30) | Product turnover (D25) |
| Credit constraints (E51) | Export volumes (A30) |
| Financial institutions (G21) | Number of trading partners (F10) |
| Financial institutions (G21) | Entry into smaller markets (D40) |
| Financial development (O16) | Trade margins (F14) |
| One-standard-deviation improvement in financial development (O16) | Human capital and physical capital increases (J24) |