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Financial Choice in a Non-Ricardian Model of Trade

  • Katheryn Russ
  • Diego Valderrama

    (Department of Economics, University of California Davis)

We join the new trade theory with a model of choice between bank and bond financing to show the differential effects of financial policy on the distribution of firm size, welfare, aggregate output, gains from trade, and the real exchange rate in a small open economy. Increasing bank efficiency and reducing bond transaction costs both increase welfare but have opposite effects on the extensive margin of trade, aggregate exports, and the real exchange rate. Increasing the degree of trade openness increases firms? relative demand for bond versus bank financing. We identify a financial switching channel for gains from trade where increasing access to export markets allows firms to overcome high fixed costs of bond issuance to secure a lower marginal cost of capital.

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File URL: http://wp.econ.ucdavis.edu/10-9.pdf
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Paper provided by University of California, Davis, Department of Economics in its series Working Papers with number 109.

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Date of creation: 18 May 2010
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Handle: RePEc:cda:wpaper:10-9
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  1. Feenstra, Robert & Luck, Philip & Obstfeld, Maurice & Russ, Katheryn N., 2014. "In Search of the Armington Elasticity," CEPR Discussion Papers 9951, C.E.P.R. Discussion Papers.
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  17. Levchenko, Andrei A. & Rancière, Romain & Thoenig, Mathias, 2009. "Growth and risk at the industry level: The real effects of financial liberalization," Journal of Development Economics, Elsevier, vol. 89(2), pages 210-222, July.
  18. Massimo Del Gatto & Gianmarco I.P. Ottaviano & Marcello Pagnini, 2007. "Openess to trade and industry cost dispersion: Evidence from a panel of Italian firms," Temi di discussione (Economic working papers) 635, Bank of Italy, Economic Research and International Relations Area.
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