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Finance, comparative advantage, and resource allocation

Melise Jaud, Madina Kukenova and Martin Strieborny

No 6111, Policy Research Working Paper Series from The World Bank

Abstract: The authors show that exported products exit the US market sooner if they violate the Heckscher-Ohlin notion of comparative advantage. Crucially, this pattern is stronger when exporting country has a well-developed banking system, measured by a high ratio of bank credit over the GDP. Banks thus push firms away from exports that are facing an uphill battle on a competitive foreign market due to a suboptimal use of the domestic factor endowment. The results imply a disciplining role for bank credit in terminating inefficient trade flows. This constitutes a new channel through which finance improves resource allocation in the real economy.

Keywords: Markets and Market Access; Economic Theory&Research; Banks&Banking Reform; Debt Markets; Inequality (search for similar items in EconPapers)
Date: 2012-06-01
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