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Capital, finance, and trade collapse


  • Yang Jiao
  • Yi Wen


This paper proposes a model of international trade with capital accumulation and financial intermediation. This is achieved by embedding the Melitz (2003) model into an incomplete-markets neoclassical framework with an endogenous credit market. The model preserves the analytical tractability of the original Melitz model despite non-trivial distribution of firms’ net worth and capital stocks. We use the model to examine the differential effects of financial and non-financial shocks on aggregate output and international trade flows. The model predicts that trade volume declines far more sharply and significantly than that of output (with an elasticity larger than 3) under financial shocks than under non-financial shocks. The prediction is consistent with the stylized fact that most countries that experienced major financial crises had significantly larger and sharper contraction in exports than aggregate output (as is also true during the recent financial crisis). In the long run, however, a deeper financial market is a great source of "comparative advantage"— it raises not only the level of aggregate productivity but also the ratio of trade volume to domestic output.>

Suggested Citation

  • Yang Jiao & Yi Wen, 2012. "Capital, finance, and trade collapse," Working Papers 2012-003, Federal Reserve Bank of St. Louis.
  • Handle: RePEc:fip:fedlwp:2012-003

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    References listed on IDEAS

    1. Andrew B. Bernard & Jonathan Eaton & J. Bradford Jensen & Samuel Kortum, 2003. "Plants and Productivity in International Trade," American Economic Review, American Economic Association, vol. 93(4), pages 1268-1290, September.
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    Financial crises ; Credit ; International trade;

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