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Financial Frictions and Trade Dynamics

Author

Listed:
  • Paul Bergin

    (University of California at Davis
    NBER)

  • Ling Feng

    (Shanghai University of Finance and Economics)

  • Ching-Yi Lin

    (National Tsing Hua University)

Abstract

This paper demonstrates theoretically that a financial shock can have highly persistent effects on international trade. Motivation is taken from the aftermath of the dramatic trade collapse in 2008–2009, which, despite a substantial recovery, has left a persistently slower growth rate in trade. We find conditions under which a transitory financial shock significantly reduces the investment by firms in entering the export market, and that this can have long-lasting effects on the range of goods exported and hence overall trade. Important to our mechanism are endogenous capital structure decisions by firms in response to the financial shock, and firm entry investment that requires traded goods. This mechanism provides an example of how firm dynamics can serve as a potent propagation mechanism, generating very long-lasting effects of transitory macroeconomic shocks.

Suggested Citation

  • Paul Bergin & Ling Feng & Ching-Yi Lin, 2018. "Financial Frictions and Trade Dynamics," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 66(3), pages 480-526, September.
    • Handle: RePEc:pal:imfecr:v:66:y:2018:i:3:d:10.1057_s41308-018-0060-x
    DOI: 10.1057/s41308-018-0060-x
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    1. Bergin, Paul R. & Feng, Ling & Lin, Ching-Yi, 2021. "Trade and firm financing," Journal of International Economics, Elsevier, vol. 131(C).
    2. Eduardo Gutiérrez & Enrique Moral-Benito, 2019. "Trade and credit: revisiting the evidence," Working Papers 1901, Banco de España.

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    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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