Financial Frictions and Trade Dynamics
Paul Bergin (),
Ling Feng () and
Ching-Yi Lin ()
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Paul Bergin: University of California at Davis
Ling Feng: Shanghai University of Finance and Economics
Ching-Yi Lin: National Tsing Hua University
IMF Economic Review, 2018, vol. 66, issue 3, 480-526
Abstract This paper demonstrates theoretically that a financial shock can have highly persistent effects on international trade. Motivation is taken from the aftermath of the dramatic trade collapse in 2008–2009, which, despite a substantial recovery, has left a persistently slower growth rate in trade. We find conditions under which a transitory financial shock significantly reduces the investment by firms in entering the export market, and that this can have long-lasting effects on the range of goods exported and hence overall trade. Important to our mechanism are endogenous capital structure decisions by firms in response to the financial shock, and firm entry investment that requires traded goods. This mechanism provides an example of how firm dynamics can serve as a potent propagation mechanism, generating very long-lasting effects of transitory macroeconomic shocks.
JEL-codes: F4 (search for similar items in EconPapers)
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