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Trade Liberalization with Endogenous Borrowing Constraints

Author

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  • Alessandro Dovis

    (University of Minnesota)

  • Wyatt Brooks

    (University of Minnesota)

Abstract

A recent empirical literature has documented that credit availability is a significant barrier for firm-level exports. We develop a dynamic general equilibrium trade model with heterogeneous monopolistic competitive firms and imperfect credit markets due to limited contract enforceability. We show that this model is consistent with the findings of the empirical literature. We ask if credit constraints reduce gains from a tariff reduction. In a calibrated example, we find that the percentage change in steady state consumption is in an economy with limited enforcement is approximately equal to the change in an equivalent one with perfect credit markets. We conclude that the presence of financial constraints at the firm level does not reduce the aggregate gains from a tariff reduction. This is because the credit constraints respond to profit opportunities. When tariffs are reduced, exporters are more profitable, which allows them to borrow more. In an equivalent economy where credit constraints are exogenous, there is a 10% smaller increase in consumption from tariff reduction.

Suggested Citation

  • Alessandro Dovis & Wyatt Brooks, 2011. "Trade Liberalization with Endogenous Borrowing Constraints," 2011 Meeting Papers 631, Society for Economic Dynamics.
  • Handle: RePEc:red:sed011:631
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    References listed on IDEAS

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    Cited by:

    1. Stephane Verani, 2018. "Aggregate Consequences of Dynamic Credit Relationships," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 29, pages 44-67, July.
    2. David Kohn & Fernando Leibovici & Michal Szkup, 2016. "Financial Frictions And New Exporter Dynamics," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 57, pages 453-486, May.
    3. Stephane Verani, 2018. "Aggregate Consequences of Dynamic Credit Relationships," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 29, pages 44-67, July.

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