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Financial Frictions, Trade, and Misallocation
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Financial Frictions, Trade, and Misallocation

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  • Kohn, David
  • Leibovici, Fernando
  • Szkup, Michal

Abstract

We investigate the extent to which financial frictions shape the aggregate effects of a trade liberalization through their impact on aggregate total factor productivity (TFP) and capital misallocation. We study a small open economy populated with heterogeneous entrepreneurs who differ in their productivity and are subject to financing constraints. Individuals choose whether to be workers or entrepreneurs, and entrepreneurs choose whether to export or not. We show how financial frictions distort these decisions and aggregate TFP. We calibrate the model to match key features of Chilean plant-level data and use it to quantify the TFP losses due to misallocation. We then investigate how the presence of financial constraints affects the output and TFP gains from trade liberalization. We find that lowering trade barriers has a stronger positive effect in less financially developed economies. The higher profits that result from trade liberalizations allow firms to accumulate assets and relax their credit constraint, which is particularly valuable in economies where firms are severely constrained.

Suggested Citation

  • Kohn, David & Leibovici, Fernando & Szkup, Michal, 2017. "Financial Frictions, Trade, and Misallocation," Research Department working papers 1106, CAF Development Bank Of Latinamerica.
    • Handle: RePEc:dbl:dblwop:1106
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    References listed on IDEAS

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    Cited by:

    1. N. R. Ramírez-Rondán & Marco E. Terrones & Andrea Vilchez, 2020. "Does financial sector development affect the growth gains from trade openness?," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 156(3), pages 475-515, August.
    2. Laszlo Tetenyi, 2021. "Trade, Misallocation, and Capital Market Integration," Working Papers w202119, Banco de Portugal, Economics and Research Department.
    3. Tetenyi, Laszlo, 2019. "Trade, misallocation, and capital market integration," IWH-CompNet Discussion Papers 8/2019, Halle Institute for Economic Research (IWH).

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    Keywords

    Economía; Emprendimiento; Investigación socioeconómica; Productividad; Sector productivo; Comercio internacional; Finanzas;
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