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

Ryoji Ohdoi, Kazuo Mino () and Yunfang Hu ()
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Kazuo Mino: Kyoto Institute of Economic Research, Kyoto University
Yunfang Hu: Graduate School of Economics, Kobe University

No 256-2, Discussion Paper Series from School of Economics, Kwansei Gakuin 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.

Keywords: Banks; Endogenous growth; Heterogeneous firms; Asymmetric countries; Financial frictions; Country-specific credit crunch (search for similar items in EconPapers)
JEL-codes: F12 F43 O16 O41 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2023-08, Revised 2025-04
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http://192.218.163.163/RePEc/pdf/kgdp256-2.pdf Revised version, 2025 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:kgu:wpaper:256-2

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