Capital Market Imperfections and Trade Liberalization in General Equilibrium

Michael Irlacher and Florian Unger

Discussion Papers in Economics from University of Munich, Department of Economics

Abstract: This paper develops a new international trade model with capital market imperfections and endogenous borrowing costs in general equilibrium. Our theoretical model is motivated by new empirical patterns from enterprise survey data of the World Bank. Observing that a substantial fraction of the variation in financial constraints is across firms within industries, we allow for firm-specific exposure to financial constraints. This leads to credit rationing and divides producers into financially constrained and unconstrained ones. We show that endogenous adjustments of capital costs represent a new channel that reduces common gains from globalization. Trade liberalization increases the demand for capital and thus the borrowing rate. This leads to a reallocation of market shares towards financially unconstrained producers and a larger fraction of credit-rationed firms. Both effects increase the within-industry variance of firm outcomes and reduce welfare gains as consumers dislike heterogeneity in prices.

Keywords: Credit constraints; General equilibrium; Globalization; Imperfect capital markets; Welfare (search for similar items in EconPapers)
JEL-codes: F10 F36 F61 L11 (search for similar items in EconPapers)
Date: 2015-05-18
New Economics Papers: this item is included in nep-dge and nep-int
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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https://epub.ub.uni-muenchen.de/24848/1/Irlacher%26Unger_2015.pdf (application/pdf)

Related works:
Journal Article: Capital market imperfections and trade liberalization in general equilibrium (2018)
Working Paper: Capital market imperfections and trade liberalization in general equilibrium (2018)
Working Paper: Capital Market Imperfections and Trade Liberalization in General Equilibrium (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:lmu:muenec:24848

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