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Trade Liberalization with Endogenous Borrowing Constraints

Listed author(s):
  • Alessandro Dovis

    (University of Minnesota)

  • Wyatt Brooks

    (University of Minnesota)

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.

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File URL: https://economicdynamics.org/meetpapers/2011/paper_631.pdf
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Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 631.

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Date of creation: 2011
Handle: RePEc:red:sed011:631
Contact details of provider: Postal:
Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

Web page: http://www.EconomicDynamics.org/
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  1. Pol Antràs & Ricardo J. Caballero, 2009. "Trade and Capital Flows: A Financial Frictions Perspective," Journal of Political Economy, University of Chicago Press, vol. 117(4), pages 701-744, 08.
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  3. Kalina Manova, 2013. "Credit Constraints, Heterogeneous Firms, and International Trade," Review of Economic Studies, Oxford University Press, vol. 80(2), pages 711-744.
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  13. Jermann, Urban J. & Quadrini, Vincenzo, 2007. "Stock market boom and the productivity gains of the 1990s," Journal of Monetary Economics, Elsevier, vol. 54(2), pages 413-432, March.
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  17. Manova, Kalina, 2008. "Credit constraints, equity market liberalizations and international trade," Journal of International Economics, Elsevier, vol. 76(1), pages 33-47, September.
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