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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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Cited by:
  1. Kukenova, Madina, 2011. "Financial liberalization and allocative dfficiency of capital," Policy Research Working Paper Series 5670, The World Bank.
  2. David VanHoose, 2013. "A Model of International Trade in Banking Services," Open Economies Review, Springer, vol. 24(4), pages 613-625, September.

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