No Credit, No Gain: Trade Liberalization Dynamics, Production Inputs, and Financial Development

David Kohn, Fernando Leibovici and Michal Szkup

No 2020-038, Working Papers from Federal Reserve Bank of St. Louis

Abstract: We study the role of financial development on the aggregate implications of reducing import tariffs on capital and intermediate inputs. We document empirically that financially underdeveloped economies feature a slower aggregate response following trade liberalization. To quantify these effects, we set up a general equilibrium model with heterogeneous firms subject to collateral constraints and estimate it using Colombian plant-level data. We find that low financial development substantially limited the gains from trade liberalization in Colombia in the early 1990s. More broadly, we find that low financial development substantially limits both the aggregate and welfare gains from tariff reductions.

Keywords: financial development; trade liberalization; welfare; production inputs (search for similar items in EconPapers)
JEL-codes: F1 F4 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2020-10, Revised 2022-09
New Economics Papers: this item is included in nep-dge, nep-fdg, nep-int and nep-opm
Note: Publisher DOI: https://doi.org/10.1111/iere.12620
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Citations: View citations in EconPapers (1)

Published in International Economic Review

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Related works:
Journal Article: NO CREDIT, NO GAIN: TRADE LIBERALIZATION DYNAMICS, PRODUCTION INPUTS, AND FINANCIAL DEVELOPMENT (2023)
Working Paper: No Credit, No Gain: Trade Liberalization Dynamics, Production Inputs, and Financial Development (2020)
Working Paper: Financial Development and Trade Liberalization (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedlwp:88990

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DOI: 10.20955/wp.2020.038

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