Newtoning financial development with heterogeneous firms

Rafael Cezar

No 332064, Conference papers from Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project

Abstract: This article theoretically and empirically tests the link between financial constraints and the extensive (proportion of exporters) and intensive (volume of exports) margins of international trade. The article's main contribution is its macroeconomic analysis of this relationship, which is further reaching than the sector-based focus found in the current literature. It also presents new information on firm behavior under financial constraints. The paper develops a trade model with heterogeneous firms and shows that countries with a high level of financial development have a lower productivity cut-off above which firms export and a higher proportion of exporting firms. Nevertheless, financial development is not correlated with firms' export volumes once they become exporters. An empirical analysis is developed on the basis of an international trade database on 135 countries between 1994 and 2007. The empirical analysis estimates a two-step gravity equation using panel data and confirms the first theoretical proposition that finance has a positive impact on the extensive margin. However, the intensive margin results are striking. They find a negative relationship between financial development and trade flows, confirmed by all the sensitivity tests. Despite the positive effect of financial development found by the literature in some economic sectors, the macroeconomic impact on overall exports was negative during the analyzed period.

Keywords: Financial Economics; International Relations/Trade (search for similar items in EconPapers)
Pages: 33
Date: 2011
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Working Paper: Newtoning financial development with heterogeneous firms (2012)
Working Paper: Newtoning financial development with heterogeneous firms (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:ags:pugtwp:332064

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