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Financial choice and international trade

Ilhyun Cho, Silvio Contessi, Katheryn N. Russ and Diego Valderrama ()

Journal of Economic Behavior & Organization, 2019, vol. 157, issue C, 297-319

Abstract: Motivated by existing and new stylized facts, we join the new trade theory with a model of choice between bank and bond financing to show the differential effects of financial policy on the distribution of firm size, gains from trade, and the real exchange rate in a small open economy. Increasing bank efficiency and reducing bond transaction costs have opposite effects on the extensive margin of trade, aggregate exports, and the real exchange rate. Increasing access to export markets generates a financial switching channel for gains from trade, allowing firms to overcome high fixed costs of bond issuance to secure a lower marginal cost of capital.

Keywords: Financial choice; Heterogeneous firms; Margins of trade; Corporate debt; Trade liberalization; Financial development (search for similar items in EconPapers)
JEL-codes: F12 F4 F65 (search for similar items in EconPapers)
Date: 2019
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Journal of Economic Behavior & Organization is currently edited by Houser, D. and Puzzello, D.

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Handle: RePEc:eee:jeborg:v:157:y:2019:i:c:p:297-319