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Newtoning financial development with heterogeneous firms

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  • Cezar, Rafael

Abstract

This article theoretically and empirically tests the link between financial constraints and the extensive (proportion of exporters) and intensive (volume of exports) margins of international trade. The article's main contribution is its macroeconomic analysis of this relationship, which is further reaching than the sector-based focus found in the current literature. It also presents new information on firm behavior under financial constraints. The paper develops a trade model with heterogeneous firms and shows that countries with a high level of financial development have a lower productivity cut-off above which firms export and a higher proportion of exporting firms. Nevertheless, financial development is not correlated with firms' export volumes once they become exporters. An empirical analysis is developed on the basis of an international trade database on 135 countries between 1994 and 2007. The empirical analysis estimates a two-step gravity equation using panel data and confirms the first theoretical proposition that finance has a positive impact on the extensive margin. However, the intensive margin results are striking. They find a negative relationship between financial development and trade flows, confirmed by all the sensitivity tests. Despite the positive effect of financial development found by the literature in some economic sectors, the macroeconomic impact on overall exports was negative during the analyzed period.

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Bibliographic Info

Paper provided by Paris Dauphine University in its series Economics Papers from University Paris Dauphine with number 123456789/7596.

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Date of creation: Jul 2012
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Handle: RePEc:dau:papers:123456789/7596

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Keywords: trade; Financial development; heterogeneous firms;

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References

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  1. James E. Anderson & Eric van Wincoop, 2000. "Gravity with Gravitas: A Solution to the Border Puzzle," Boston College Working Papers in Economics 485, Boston College Department of Economics.
  2. Nicolas Berman & Jérôme Héricourt, 2008. "Financial factors and the margins of trade : evidence from cross-country firm-level data," Documents de travail du Centre d'Economie de la Sorbonne bla08050, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
  3. Thomas Chaney, 2007. "Liquidity Constrained Exporters," 2007 Meeting Papers 979, Society for Economic Dynamics.
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  5. Beck, Thorsten, 2001. "Financial development and international trade : is there a link?," Policy Research Working Paper Series 2608, The World Bank.
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  18. repec:fth:wobaco:1083 is not listed on IDEAS
  19. King, Robert G & Levine, Ross, 1993. "Finance and Growth: Schumpeter Might Be Right," The Quarterly Journal of Economics, MIT Press, vol. 108(3), pages 717-37, August.
  20. Thomas Chaney, 2008. "Distorted Gravity: The Intensive and Extensive Margins of International Trade," American Economic Review, American Economic Association, vol. 98(4), pages 1707-21, September.
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Cited by:
  1. Rafael Cezar, 2012. "Le développement financier et les avantages commerciaux," Working Papers DT/2012/19, DIAL (Développement, Institutions et Mondialisation).
  2. Rafael Cezar, 2012. "Un nouvel indice du développement financier," Working Papers DT/2012/04, DIAL (Développement, Institutions et Mondialisation).

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