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Trade Liberalization with Endogenous Borrowing Constraints

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  • Alessandro Dovis

    (University of Minnesota)

  • Wyatt Brooks

    (University of Minnesota)

Abstract

A recent empirical literature has documented that credit availability is a significant barrier for firm-level exports. We develop a dynamic general equilibrium trade model with heterogeneous monopolistic competitive firms and imperfect credit markets due to limited contract enforceability. We show that this model is consistent with the findings of the empirical literature. We ask if credit constraints reduce gains from a tariff reduction. In a calibrated example, we find that the percentage change in steady state consumption is in an economy with limited enforcement is approximately equal to the change in an equivalent one with perfect credit markets. We conclude that the presence of financial constraints at the firm level does not reduce the aggregate gains from a tariff reduction. This is because the credit constraints respond to profit opportunities. When tariffs are reduced, exporters are more profitable, which allows them to borrow more. In an equivalent economy where credit constraints are exogenous, there is a 10% smaller increase in consumption from tariff reduction.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 631.

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Date of creation: 2011
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Handle: RePEc:red:sed011:631

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  1. Yuriy Gorodnichenko & Monika Schnitzer, 2010. "Financial constraints and innovation: Why poor countries don't catch up," NBER Working Papers 15792, National Bureau of Economic Research, Inc.
  2. Pol Antràs & Ricardo J. Caballero, 2007. "Trade and Capital Flows: A Financial Frictions Perspective," NBER Working Papers 13241, National Bureau of Economic Research, Inc.
  3. James Levinsohn & Amil Petrin, 2000. "Estimating Production Functions Using Inputs to Control for Unobservables," NBER Working Papers 7819, National Bureau of Economic Research, Inc.
  4. Manova, Kalina, 2008. "Credit constraints, equity market liberalizations and international trade," Journal of International Economics, Elsevier, Elsevier, vol. 76(1), pages 33-47, September.
  5. Minetti, Raoul & Zhu, Susan Chun, 2011. "Credit constraints and firm export: Microeconomic evidence from Italy," Journal of International Economics, Elsevier, Elsevier, vol. 83(2), pages 109-125, March.
  6. Kehoe, Timothy J & Levine, David K, 1993. "Debt-Constrained Asset Markets," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 60(4), pages 865-88, October.
  7. Gueorgui Kambourov, 2009. "Labour Market Regulations and the Sectoral Reallocation of Workers: The Case of Trade Reforms," Review of Economic Studies, Oxford University Press, vol. 76(4), pages 1321-1358.
  8. Costas Arkolakis & Arnaud Costinot & Andres Rodriguez-Clare, 2012. "New Trade Models, Same Old Gains?," American Economic Review, American Economic Association, American Economic Association, vol. 102(1), pages 94-130, February.
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  10. Andrew Atkeson & Ariel Burstein, 2010. "Innovation, firm dynamics, and international trade," Staff Report, Federal Reserve Bank of Minneapolis 444, Federal Reserve Bank of Minneapolis.
  11. 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, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne bla08050, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
  12. George Alessandria & Horag Choi, 2007. "Establishment heterogeneity, exporter dynamics, and the effects of trade liberalization," Working Papers 07-17, Federal Reserve Bank of Philadelphia.
  13. Hopenhayn, Hugo A, 1992. "Entry, Exit, and Firm Dynamics in Long Run Equilibrium," Econometrica, Econometric Society, Econometric Society, vol. 60(5), pages 1127-50, September.
  14. Kiyotaki, Nobuhiro & Moore, John, 1997. "Credit Cycles," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 105(2), pages 211-48, April.
  15. Greenaway, David & Guariglia, Alessandra & Kneller, Richard, 2007. "Financial factors and exporting decisions," Journal of International Economics, Elsevier, Elsevier, vol. 73(2), pages 377-395, November.
  16. Kalina Manova, 2008. "Credit Constraints, Heterogeneous Firms, and International Trade," NBER Working Papers 14531, National Bureau of Economic Research, Inc.
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Cited by:
  1. Goksel, Turkmen, 2012. "Financial constraints and international trade patterns," Economic Modelling, Elsevier, Elsevier, vol. 29(6), pages 2222-2225.

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