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Trade shocks and credit reallocation

Author

Listed:
  • Stefano Federico

    (Bank of Italy)

  • Fadi Hassan

    (Bank of Italy)

  • Veronica Rappoport

    (London School of Economics)

Abstract

This paper shows that there are endogenous financial constraints arising from trade liberalization. We find that banks with a high share of loans to firms exposed to competition from China experience an increase in non-performing loans and a reduction in their credit capacity. The drop in credit supply affects both firms directly exposed to import-competition from China and firms expected to expand upon trade liberalization, with economically relevant implications in terms of employment, investment, and output. This financial spillover between losers and winners from trade holds back the reallocation of factors of production between firms and sectors, which is crucial to the welfare implication of trade liberalization.

Suggested Citation

  • Stefano Federico & Fadi Hassan & Veronica Rappoport, 2020. "Trade shocks and credit reallocation," Temi di discussione (Economic working papers) 1289, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:wptemi:td_1289_20
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    Cited by:

    1. Federico Cingano & Fadi Hassan, 2020. "International financial flows and misallocation," CEP Discussion Papers dp1697, Centre for Economic Performance, LSE.
    2. repec:zbw:bofitp:2022_008 is not listed on IDEAS
    3. Ricardo Correa & Julian di Giovanni & Linda S. Goldberg & Camelia Minoiu, 2023. "Trade Uncertainty and U.S. Bank Lending," International Finance Discussion Papers 1383, Board of Governors of the Federal Reserve System (U.S.).
    4. Mathias Hoffmann & Lilia Ruslanova, 2020. "Softening the blow: U.S. state-level banking deregulation and sectoral reallocation after the China trade shock," ECON - Working Papers 365, Department of Economics - University of Zurich, revised Apr 2021.
    5. Mayer, Thierry & Berthou, Antoine & Mésonnier, Jean-Stéphane, 2021. "Good connections : bank specialization and the tariff elasticity of exports," CEPR Discussion Papers 15890, C.E.P.R. Discussion Papers.
    6. Cao, Jin & Dinger, Valeriya & Juelsrud, Ragnar E. & Liaudinskas, Karolis, 2022. "Trade conflicts and credit supply spillovers : Evidence from the Nobel Peace Prize trade shock," BOFIT Discussion Papers 8/2022, Bank of Finland, Institute for Economies in Transition.
    7. Cai, Yue, 2021. "Expansionary monetary policy and credit allocation: Evidence from China," China Economic Review, Elsevier, vol. 66(C).
    8. Izadi, Mohammad & Saadi, Vahid, 2023. "Banking Market Structure and Trade Shocks," Journal of Banking & Finance, Elsevier, vol. 153(C).
    9. Jin Cao & Valeriya Dinger & Ragnar E. Juelsrud & Karolis Liaudinskas, 2022. "Trade Conflicts and Credit Supply Spillovers: Evidence from the Nobel Peace Prize Trade Shock," CESifo Working Paper Series 10036, CESifo.

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    More about this item

    Keywords

    trade liberalisation; China shock; bank credit; resource reallocation; gains from trade;
    All these keywords.

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F65 - International Economics - - Economic Impacts of Globalization - - - Finance
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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