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

David Kohn, Fernando Leibovici and Michal Szkup

No 553, Documentos de Trabajo from Instituto de Economia. Pontificia Universidad Católica de Chile.

Abstract: We study the role of financial development on the aggregate and welfare implications of reducing trade barriers on imports of physical capital and intermediate inputs. We document that financially underdeveloped economies feature a slower response of real GDP, consumption, and investment following trade liberalization episodes that improve access to imported production inputs. To quantify the role of financial development, we set up a quantitative general equilibrium model with heterogeneous firms subject to financial constraints and estimate it to match salient features from Colombian plantlevel data. We find that the adjustment to a decline of import tariffs on physical capital and intermediate inputs is significantly slower in financially underdeveloped economies in line with the empirical evidence. These effects reduce the welfare gains from trade liberalization and make them more unequal across agents.

Date: 2020
New Economics Papers: this item is included in nep-dge, nep-fdg, nep-int, nep-mac and nep-opm
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Citations: View citations in EconPapers (1)

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https://www.economia.uc.cl/docs/doctra/dt-553-v3.pdf (application/pdf)

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 (2022)
Working Paper: Financial Development and Trade Liberalization (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:ioe:doctra:553

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