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Finance, comparative advantage, and resource allocation

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  • Jaud, Melise
  • Kukenova, Madina
  • Strieborny, Martin

Abstract

The authors show that exported products exit the US market sooner if they violate the Heckscher-Ohlin notion of comparative advantage. Crucially, this pattern is stronger when exporting country has a well-developed banking system, measured by a high ratio of bank credit over the GDP. Banks thus push firms away from exports that are facing an uphill battle on a competitive foreign market due to a suboptimal use of the domestic factor endowment. The results imply a disciplining role for bank credit in terminating inefficient trade flows. This constitutes a new channel through which finance improves resource allocation in the real economy.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 6111.

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Date of creation: 01 Jun 2012
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Handle: RePEc:wbk:wbrwps:6111

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Keywords: Markets and Market Access; Economic Theory&Research; Banks&Banking Reform; Debt Markets; Inequality;

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References

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Cited by:
  1. Kukenova, Madina, 2011. "Financial liberalization and allocative dfficiency of capital," Policy Research Working Paper Series 5670, The World Bank.

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