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Financial Development and International Trade

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Abstract

This paper studies the industry-level and aggregate implications of financial development on international trade. I set up a multi-industry general equilibrium model of international trade with input-output linkages and heterogeneous firms subject to financial frictions. Industries differ in capital-intensity, which leads to differences in external finance dependence. The model is parameterized to match key features of firm-level data. Financial development leads to substantial reallocation of international trade shares from labor- to capital-intensive industries, with minor effects at the aggregate-level. These findings are consistent with estimates from cross-country industry-level and aggregate data.

Suggested Citation

  • Fernando Leibovici, 2018. "Financial Development and International Trade," Working Papers 2018-015, Federal Reserve Bank of St. Louis, revised Feb 2021.
    • Handle: RePEc:fip:fedlwp:2018-015
    DOI: 10.20955/wp.2018.015
    Note: Publisher DOI: https://doi.org/10.1086/716564
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    More about this item

    Keywords

    international trade; credit constraints; financial frictions; reallocation; welfare;
    All these keywords.

    JEL classification:

    • F1 - International Economics - - Trade
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development

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