Behind the International Trade Network: the Role of Heterogeneity and Financial Frictions

Modern economies exhibit deeply integrated and synchronized networks among heterogeneous agents. This paper focuses on the trade network and seeks to unravel the mechanisms that underpin its emergence and evolution. To this end, we develop a multi-country general equilibrium model of trade that incorporates firms and countries heterogeneity as well as asymmetric information and financial frictions. Within this framework, the export decisions of firms give rise to an international trade network that mirrors the structure of real-world trade flows. Thus, the model, by encompassing both within and between country heterogeneity, facilitates the investigation of a range of stylized facts pertaining to firm exporting behavior and globalization. Once the network is established, the paper aims at capturing the effects of financial shocks on trade flows and their network-based spillovers. The introduction of a credit market in a trade model provides novel insights on the influence of monetary and financial factors on trade patterns.