Working Paper Revision

Financial Development and International Trade


Abstract: This paper studies the industry-level and aggregate implications of financial development on international trade. I set up a multi-industry general equilibrium model of international trade with input-output linkages and heterogeneous firms subject to financial frictions. Industries differ in capital-intensity, which leads to differences in external finance dependence. The model is parameterized to match key features of firm-level data. Financial development leads to substantial reallocation of international trade shares from labor- to capital-intensive industries, with minor effects at the aggregate-level. These findings are consistent with estimates from cross-country industry-level and aggregate data.

Keywords: international trade; credit constraints; financial frictions; reallocation; welfare;

JEL Classification: F1; F4; O1;

https://doi.org/10.20955/wp.2018.015

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Provider: Federal Reserve Bank of St. Louis

Part of Series: Working Papers

Publication Date: 2021-02

Number: 2018-015

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