Working Paper: NBER ID: w30901
Authors: Pol Antràs
Abstract: I develop a stylized model of multi-stage production in which the time length of each stage is endogenously determined. Letting the production process mature for a longer period of time increases labor productivity, but it comes at the cost of higher working capital needs for firms. Under autarky, countries with lower interest rates feature longer production processes, higher labor productivity, and higher wages. In a free trade equilibrium, countries with lower interest rates specialize in relatively ‘time intensive’ stages in global value chains (GVCs). Yet, if free trade brings about interest rate equalization, wages are also equalized and the pattern of trade is instead shaped by capital intensity and capital abundance, regardless of the time intensity of the various stages. Reductions in trade costs lead to patterns of specialization associated with higher amounts of vertical specialization in world trade. A worldwide decline in interest rates similarly fosters an increase in the share of GVC trade in world trade. The framework also sheds light on the role of trade credit and trade finance in shaping international specialization.
Keywords: No keywords provided
JEL Codes: F1; F2; F4; F6
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| lower interest rates (E43) | longer production processes (L23) |
| longer production processes (L23) | labor productivity (J24) |
| labor productivity (J24) | increase wages (J38) |
| lower interest rates (E43) | labor productivity (J24) |
| lower interest rates (E43) | increase wages (J38) |
| lower interest rates (E43) | specialization in time-intensive stages of GVCs (F12) |
| reductions in trade costs (F12) | increased vertical specialization in world trade (F12) |
| decreased trade barriers (F19) | enhanced complexity of GVCs (F12) |
| interest rates equalize globally (E43) | wages equalize (J31) |
| interest rates equalize globally (E43) | shift in determinants of trade patterns from time intensity to capital intensity and capital abundance (F12) |