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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. Heckman, James J, 1979. "Sample Selection Bias as a Specification Error," Econometrica, Econometric Society, vol. 47(1), pages 153-61, January.
  2. Beck, T.H.L., 2002. "Financial development and international trade: Is there a Link?," Open Access publications from Tilburg University urn:nbn:nl:ui:12-3125515, Tilburg University.
  3. King, Robert G. & Levine, Ross, 1993. "Finance and growth : Schumpeter might be right," Policy Research Working Paper Series 1083, The World Bank.
  4. Nicolas Berman & Jérôme Héricourt, 2008. "Financial Factors and the Margins of Trade: Evidence from Cross-Country Firm-Level Data," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00321632, HAL.
  5. Raghuram G. Rajan & Luigi Zingales, . "Financial Dependence and Growth," CRSP working papers 344, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  6. Andrew K. Rose, 2002. "Do We Really Know that the WTO Increases Trade?," NBER Working Papers 9273, National Bureau of Economic Research, Inc.
  7. Mirabelle Muûls, 2008. "Exporters and credit constraints. A firm-level approach," Working Paper Research 139, National Bank of Belgium.
  8. 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.
  9. Mark J. Melitz, 2002. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," NBER Working Papers 8881, National Bureau of Economic Research, Inc.
  10. Thorsten Beck, 2003. "Financial Dependence and International Trade," Review of International Economics, Wiley Blackwell, vol. 11(2), pages 296-316, 05.
  11. Kenneth Kletzer and Pranab Bardhan., 1986. "Credit Markets and Patterns of International Trade," Economics Working Papers 8612, University of California at Berkeley.
  12. Levine, Ross, 2005. "Finance and Growth: Theory and Evidence," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 12, pages 865-934 Elsevier.
  13. Hur, Jung & Raj, Manoj & Riyanto, Yohanes E., 2006. "Finance and trade: A cross-country empirical analysis on the impact of financial development and asset tangibility on international trade," World Development, Elsevier, vol. 34(10), pages 1728-1741, October.
  14. Beck, T.H.L. & Demirgüç-Kunt, A. & Levine, R., 2000. "A new database on financial development and structure," Open Access publications from Tilburg University urn:nbn:nl:ui:12-3125518, Tilburg University.
  15. Antoine Berthou, 2010. "The Distorted Effect of Financial Development on International Trade Flows," Working Papers 2010-09, CEPII research center.
  16. Mitali Das & Whitney K. Newey & Francis Vella, 2003. "Nonparametric Estimation of Sample Selection Models," Review of Economic Studies, Oxford University Press, vol. 70(1), pages 33-58.
  17. Thomas Chaney, 2013. "Liquidity Constrained Exporters," NBER Working Papers 19170, National Bureau of Economic Research, Inc.
  18. Joao Santos Silva & Silvana Tenreyro, 2005. "The Log of Gravity," CEP Discussion Papers dp0701, Centre for Economic Performance, LSE.
  19. J. M. C. Santos Silva & Silvana Tenreyro, 2009. "Trading Partners and Trading Volumes: Implementing the Helpman-Melitz-Rubinstein Model Empirically," CEP Discussion Papers dp0935, Centre for Economic Performance, LSE.
  20. Scott L. Baier & Jeffrey H. Bergstrand, 2005. "Do free trade agreements actually increase members’ international trade?," Working Paper 2005-03, Federal Reserve Bank of Atlanta.
  21. repec:fth:wobaco:1083 is not listed on IDEAS
  22. Wooldridge, Jeffrey M., 1995. "Selection corrections for panel data models under conditional mean independence assumptions," Journal of Econometrics, Elsevier, vol. 68(1), pages 115-132, July.
  23. 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.
  24. Andrei A. Levchenko, 2007. "Institutional Quality and International Trade," Review of Economic Studies, Oxford University Press, vol. 74(3), pages 791-819.
  25. Svaleryd, Helena & Vlachos, Jonas, 2005. "Financial markets, the pattern of industrial specialization and comparative advantage: Evidence from OECD countries," European Economic Review, Elsevier, vol. 49(1), pages 113-144, January.
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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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