Working Paper Revision
No Credit, No Gain: Trade Liberalization Dynamics, Production Inputs, and Financial Development
Abstract: We study the role of financial development on the aggregate and welfare implications of reducing import tariffs on capital and intermediate inputs. We document that financially underdeveloped economies feature a slower aggregate response following trade liberalization. We set up a quantitative general equilibrium model with heterogeneous firms subject to collateral constraints and estimate it to match salient features from Colombian plant-level data. Our model explains a substantial fraction of the differences in the empirical responses of GDP, consumption, and capital across economies with different levels of financial development. Slow adjustment due to collateral constraints reduces welfare gains from trade liberalization.
Keywords: financial development; trade liberalization; welfare; production inputs;
https://doi.org/10.20955/wp.2020.038
Status: Published in International Economic Review
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Bibliographic Information
Provider: Federal Reserve Bank of St. Louis
Part of Series: Working Papers
Publication Date: 2022-03
Number: 2020-038
Note: Publisher DOI: https://doi.org/10.1111/iere.12620
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