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No Credit, No Gain: Trade Liberalization Dynamics, Production Inputs, and Financial Development

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Abstract

We study the role of financial development on the aggregate and welfare implications of reducing trade barriers on imports of physical capital and intermediate inputs. We document that financially underdeveloped economies feature a slower response of real GDP, consumption, and investment following trade liberalization episodes that improve access to imported production inputs. To quantify the role of financial development, we set up a quantitative general equilibrium model with heterogeneous firms subject to financial constraints and estimate it to match salient features from Colombian plant-level data. We find that the adjustment to a decline of import tariffs on physical capital and intermediate inputs is significantly slower in financially underdeveloped economies in line with the empirical evidence. These effects reduce the welfare gains from trade liberalization and make them more unequal across agents.

Suggested Citation

  • David Kohn & Fernando Leibovici & Michal Szkup, 2020. "No Credit, No Gain: Trade Liberalization Dynamics, Production Inputs, and Financial Development," Working Papers 2020-038, Federal Reserve Bank of St. Louis, revised Dec 2020.
  • Handle: RePEc:fip:fedlwp:88990
    DOI: 10.20955/wp.2020.038
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    Cited by:

    1. Kohn, David & Leibovici, Fernando & Szkup, Michal, 2020. "Financial frictions and export dynamics in large devaluations," Journal of International Economics, Elsevier, vol. 122(C).
    2. Fernando Leibovici, 2013. "Financial Development and International Trade," 2013 Meeting Papers 532, Society for Economic Dynamics.
    3. Daniel R. Carroll & Sewon Hur, 2020. "On the Distributional Effects of International Tariffs," Working Papers 202018, Federal Reserve Bank of Cleveland.

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    More about this item

    Keywords

    financial development; trade liberalization; welfare; production inputs;
    All these keywords.

    JEL classification:

    • F1 - International Economics - - Trade
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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