Trade, Financial Frictions, and the Missing Manufacturing Window

Marta Domínguez-Jiménez () and Santiago Etchegaray ()
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Marta Domínguez-Jiménez: CEMFI, Centro de Estudios Monetarios y Financieros, https://www.cemfi.es/
Santiago Etchegaray: CEMFI, Centro de Estudios Monetarios y Financieros, https://www.cemfi.es/

Working Papers from CEMFI

Abstract: Why do some economies experience a pronounced manufacturing phase during structural transformation, while others move more directly into low-skilled services? This paper shows that financial underdevelopment, by shaping export competitiveness and domestic investment demand, is a quantitatively important driver of flat-manufacturing paths. Motivating evidence links financial depth to manufacturing activity and export performance. We then quantify the mechanism in a dynamic multi-country model of structural transformation and trade, where financial underdevelopment both weakens competitiveness in finance-dependent sectors and lowers demand for manufacturing-intensive investment goods. Moving flat-manufacturing economies halfway to the financial frontier closes over a quarter of the observed flat–steep peak gap; it raises real output per worker by 13 to 17 percent and real consumption per worker by 8 to 12 percent. Paired with lower nonfinancial trade costs, the same financial improvement closes almost three quarters of the peak gap, as finance shapes the manufacturing response that openness amplifies.

Keywords: International trade; Financial frictions; Structural transformation. (search for similar items in EconPapers)
JEL-codes: F12 F14 F36 F43 O14 O16 (search for similar items in EconPapers)
Date: 2026-06
New Economics Papers: this item is included in nep-fdg
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Persistent link: https://EconPapers.repec.org/RePEc:cmf:wpaper:wp2026_2607

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