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Financial Choice in a Non-Ricardian Model of Trade

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  • Katheryn Russ
  • Diego Valderrama

    (Department of Economics, University of California Davis)

Abstract

We join the new trade theory with a model of choice between bank and bond financing to show the differential effects of financial policy on the distribution of firm size, welfare, aggregate output, gains from trade, and the real exchange rate in a small open economy. Increasing bank efficiency and reducing bond transaction costs both increase welfare but have opposite effects on the extensive margin of trade, aggregate exports, and the real exchange rate. Increasing the degree of trade openness increases firms’ relative demand for bond versus bank financing. We identify a financial switching channel for gains from trade where increasing access to export markets allows firms to overcome high fixed costs of bond issuance to secure a lower marginal cost of capital.

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File URL: http://wp.econ.ucdavis.edu/10-9.pdf
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Bibliographic Info

Paper provided by University of California, Davis, Department of Economics in its series Working Papers with number 109.

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Date of creation: 18 May 2010
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Handle: RePEc:cda:wpaper:10-9

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Postal: One Shields Ave., Davis, CA 95616-8578
Phone: (530) 752-0741
Fax: (530) 752-9382
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Web page: http://www.econ.ucdavis.edu
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Keywords: heterogeneity; bank; bond; firm finance; export real exchange rate;

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  1. Thomas Chaney, 2013. "Liquidity Constrained Exporters," NBER Working Papers 19170, National Bureau of Economic Research, Inc.
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  4. Katheryn N. Russ & Diego Valderrama, 2009. "A Theory of Banks, Bonds, and the Distribution of Firm Size," NBER Working Papers 15454, National Bureau of Economic Research, Inc.
  5. José L. Fillat & Stefania Garetto, 2010. "Risk, returns, and multinational production," Risk and Policy Analysis Unit Working Paper QAU10-5, Federal Reserve Bank of Boston.
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  13. Levchenko, Andrei A. & Rancière, Romain & Thoenig, Mathias, 2009. "Growth and risk at the industry level: The real effects of financial liberalization," Journal of Development Economics, Elsevier, vol. 89(2), pages 210-222, July.
  14. Sandeep Baliga & Ben Polak, 2001. "The Emergence and Persistence of the Anglo-Saxon and German Financial Systems," Economics Working Papers 0005, Institute for Advanced Study, School of Social Science.
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  17. Katherine Smith & Diego Valderrama, 2007. "The composition of capital flows when emerging market firms face financing constraints," 2007 Meeting Papers 533, Society for Economic Dynamics.
  18. Feenstra, Robert C, 1994. "New Product Varieties and the Measurement of International Prices," American Economic Review, American Economic Association, vol. 84(1), pages 157-77, March.
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  20. Diamond, Douglas W, 1991. "Monitoring and Reputation: The Choice between Bank Loans and Directly Placed Debt," Journal of Political Economy, University of Chicago Press, vol. 99(4), pages 689-721, August.
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