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Credit constraints, firm selection, and endogenous growth: The international transmission of a credit crunch via trade

Author

Listed:
  • Ryoji Ohdoi

    (School of Economics, Kwansei Gakuin University)

  • Kazuo Mino

    (Kyoto Institute of Economic Research, Kyoto University)

  • Yunfang Hu

    (Graduate School of Economics, Kobe University)

Abstract

This study develops a two-country, heterogeneous-firm model of trade and growth with country-specific credit constraints to examine the role of firm selection as a channel for the international transmission of a credit crunch in one country. For a permanent credit crunch, we derive the following results analytically. First, the long-run growth rate of the global economy inevitably declines. Second, even in a country not directly affected by the credit crunch, its growth rate declines in both the short run and the long run. Third, this decline occurs because export profitability declines in that country's tradable goods sector, prompting firms to shift from exporting to selling domestically. In addition, we conduct a numerical analysis to compare the effects of a credit crunch under two scenarios: financial autarky (i.e., trade in goods only) and financial integration. We find that, irrespective of the credit crunch being permanent or temporary, the effects on trade and growth are similar in both scenarios, suggesting that regulating international financial transactions may fail to mitigate the cross-border transmission of the shock.

Suggested Citation

  • Ryoji Ohdoi & Kazuo Mino & Yunfang Hu, 2023. "Credit constraints, firm selection, and endogenous growth: The international transmission of a credit crunch via trade," Discussion Paper Series 256-2, School of Economics, Kwansei Gakuin University, revised Apr 2025.
    • Handle: RePEc:kgu:wpaper:256-2
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Banks; Endogenous growth; Heterogeneous firms; Asymmetric countries; Financial frictions; Country-specific credit crunch;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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