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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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  1. 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.
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  4. Mirabelle Muûls, 2008. "Exporters and credit constraints. A firm-level approach," Working Paper Research 139, National Bank of Belgium.
  5. Beck, Thorsten, 2001. "Financial dependence and international trade," Policy Research Working Paper Series 2609, The World Bank.
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  9. Joao Santos Silva & Silvana Tenreyro, 2005. "The Log of Gravity," CEP Discussion Papers dp0701, Centre for Economic Performance, LSE.
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  13. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November.
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  17. Andrei A. Levchenko, 2007. "Institutional Quality and International Trade," Review of Economic Studies, Oxford University Press, vol. 74(3), pages 791-819.
  18. 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.
  19. 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.
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  24. repec:fth:wobaco:1083 is not listed on IDEAS
  25. Thomas Chaney, 2013. "Liquidity Constrained Exporters," NBER Working Papers 19170, National Bureau of Economic Research, Inc.
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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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