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Credit Market Quality, Innovation and Trade

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  • Christina Terra
  • Enrico Vasconcelos

Abstract

Using a general equilibrium model with private R&D financing, we investigate the impact of trade openness on innovation, trade patterns and welfare for two countries that are equal in all aspects except for the quality of their credit markets. We show that trade openness increases innovation only in the country with the better credit market, while it has a negative impact on innovation when credit markets are less developed. With respect to trade patterns, the country with the worse credit market imports high-tech goods and exports traditional goods. In terms of welfare, opening to trade may lower the welfare of individuals in the short run, but in the long run, all of them are better off under free trade than if they were under autarky. JEL Codes: F12, G11, O16.

Suggested Citation

  • Christina Terra & Enrico Vasconcelos, 2020. "Credit Market Quality, Innovation and Trade," Revue économique, Presses de Sciences-Po, vol. 71(5), pages 773-814.
    • Handle: RePEc:cai:recosp:reco_715_0773
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    More about this item

    Keywords

    institutions; innovation; trade pattern;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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