IDEAS home Printed from https://ideas.repec.org/a/eee/dyncon/v154y2023ics016518892300115x.html
   My bibliography  Save this article

Domestic barriers to entry and external vulnerability in emerging economies

Author

Listed:
  • Barreto, Leonardo
  • Finkelstein Shapiro, Alan
  • Nuguer, Victoria

Abstract

Emerging economies (EMEs) exhibit high regulatory costs of firm creation. At the same time, lower firm-creation costs are associated with greater financial development and use of formal credit, which can expose EME firms to external financial shocks that propagate to EMEs via the banking system such as those that EMEs experienced during the Global Financial Crisis. We present evidence showing that in response to an adverse shock to the US banking system, EMEs with low firm-creation costs exhibit smaller contractions and earlier recoveries in cross-border bank flows, domestic bank credit, and GDP compared to EMEs with high firm-creation costs. A two-country model with banking frictions, cross-border bank flows, and endogenous firm entry can successfully capture this evidence. Our findings suggest that greater domestic credit-market deepening via lower barriers to firm entry in EMEs need not be associated with greater macro and domestic credit-market volatility.

Suggested Citation

  • Barreto, Leonardo & Finkelstein Shapiro, Alan & Nuguer, Victoria, 2023. "Domestic barriers to entry and external vulnerability in emerging economies," Journal of Economic Dynamics and Control, Elsevier, vol. 154(C).
    • Handle: RePEc:eee:dyncon:v:154:y:2023:i:c:s016518892300115x
    DOI: 10.1016/j.jedc.2023.104709
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S016518892300115X
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jedc.2023.104709?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Paul R. Bergin & Giancarlo Corsetti, 2020. "Beyond Competitive Devaluations: The Monetary Dimensions of Comparative Advantage," American Economic Journal: Macroeconomics, American Economic Association, vol. 12(4), pages 246-286, October.
    2. Cacciatore, Matteo & Duval, Romain & Fiori, Giuseppe & Ghironi, Fabio, 2016. "Market reforms in the time of imbalance," Journal of Economic Dynamics and Control, Elsevier, vol. 72(C), pages 69-93.
    3. Schmitt-Grohe, Stephanie & Uribe, Martin, 2003. "Closing small open economy models," Journal of International Economics, Elsevier, vol. 61(1), pages 163-185, October.
    4. Barseghyan, Levon & DiCecio, Riccardo, 2011. "Entry costs, industry structure, and cross-country income and TFP differences," Journal of Economic Theory, Elsevier, vol. 146(5), pages 1828-1851, September.
    5. Fabio Ghironi & Marc J. Melitz, 2005. "International Trade and Macroeconomic Dynamics with Heterogeneous Firms," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 120(3), pages 865-915.
    6. Gabriel Cuadra & Victoria Nuguer, 2018. "Risky Banks and Macro-Prudential Policy for Emerging Economies," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 30, pages 125-144, October.
    7. Florin O. Bilbiie & Fabio Ghironi & Marc J. Melitz, 2012. "Endogenous Entry, Product Variety, and Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 120(2), pages 304-345.
    8. Uribe, Martin & Yue, Vivian Z., 2006. "Country spreads and emerging countries: Who drives whom?," Journal of International Economics, Elsevier, vol. 69(1), pages 6-36, June.
    9. Philippe Aghion & Thibault Fally & Stefano Scarpetta, 2007. "Credit constraints as a barrier to the entry and post-entry growth of firms [‘Dualism and macroeconomic volatility’]," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 22(52), pages 732-779.
    10. Klapper, Leora & Laeven, Luc & Rajan, Raghuram, 2006. "Entry regulation as a barrier to entrepreneurship," Journal of Financial Economics, Elsevier, vol. 82(3), pages 591-629, December.
    11. Cacciatore, Matteo & Fiori, Giuseppe & Ghironi, Fabio, 2016. "Market deregulation and optimal monetary policy in a monetary union," Journal of International Economics, Elsevier, vol. 99(C), pages 120-137.
    12. Berthold Herrendorf & Arilton Teixeira, 2011. "Barriers To Entry And Development," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 52(2), pages 573-602, May.
    13. Cacciatore, Matteo & Ghironi, Fabio & Stebunovs, Viktors, 2015. "The domestic and international effects of interstate U.S. banking," Journal of International Economics, Elsevier, vol. 95(2), pages 171-187.
    14. La Croce, Carla & Rossi, Lorenza, 2018. "Firms' Endogenous Entry And Monopolistic Banking In A Dsge Model," Macroeconomic Dynamics, Cambridge University Press, vol. 22(1), pages 153-171, January.
    15. Andrés Fernández & Adam Gulan, 2015. "Interest Rates, Leverage, and Business Cycles in Emerging Economies: The Role of Financial Frictions," American Economic Journal: Macroeconomics, American Economic Association, vol. 7(3), pages 153-188, July.
    16. Epstein, Brendan & Finkelstein Shapiro, Alan & González Gómez, Andrés, 2019. "Global financial risk, aggregate fluctuations, and unemployment dynamics," Journal of International Economics, Elsevier, vol. 118(C), pages 351-418.
    17. Lorenza Rossi, 2015. "Endogenous Firms' ?Exit, Inefficient Banks and Business Cycle Dynamics," Working Papers LuissLab 15117, Dipartimento di Economia e Finanza, LUISS Guido Carli.
    18. Akıncı, Özge, 2013. "Global financial conditions, country spreads and macroeconomic fluctuations in emerging countries," Journal of International Economics, Elsevier, vol. 91(2), pages 358-371.
    19. Fernández, Andrés & Gulan, Adam, 2012. "Interest rates and business cycles in emerging economies: the role of financial frictions," Bank of Finland Research Discussion Papers 23/2012, Bank of Finland.
    20. Dabla-Norris, Era & Ji, Yan & Townsend, Robert M. & Filiz Unsal, D., 2021. "Distinguishing constraints on financial inclusion and their impact on GDP, TFP, and the distribution of income," Journal of Monetary Economics, Elsevier, vol. 117(C), pages 1-18.
    21. Barattieri, Alessandro & Cacciatore, Matteo & Ghironi, Fabio, 2021. "Protectionism and the business cycle," Journal of International Economics, Elsevier, vol. 129(C).
    22. Born, Benjamin & Juessen, Falko & Müller, Gernot J., 2013. "Exchange rate regimes and fiscal multipliers," Journal of Economic Dynamics and Control, Elsevier, vol. 37(2), pages 446-465.
    23. Dudley Cooke, 2016. "Optimal Monetary Policy with Endogenous Export Participation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 21, pages 72-88, July.
    24. Cavallari, Lilia, 2013. "Firms' entry, monetary policy and the international business cycle," Journal of International Economics, Elsevier, vol. 91(2), pages 263-274.
    25. Gonçalves, Sílvia & Kaffo, Maximilien, 2015. "Bootstrap inference for linear dynamic panel data models with individual fixed effects," Journal of Econometrics, Elsevier, vol. 186(2), pages 407-426.
    26. Gertler, Mark & Kiyotaki, Nobuhiro & Queralto, Albert, 2012. "Financial crises, bank risk exposure and government financial policy," Journal of Monetary Economics, Elsevier, vol. 59(S), pages 17-34.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Alan Finkelstein-Shapiro & Victoria Nuguer, 2019. "Domestic Financial Participation and Financial Policies in Emerging Economies," 2019 Meeting Papers 1479, Society for Economic Dynamics.
    2. Fabio Ghironi, 2018. "Macro needs micro," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 34(1-2), pages 195-218.
    3. Brendan Epstein & Alan Finkelstein Shapiro, 2021. "Increasing Domestic Financial Participation: Implications for Business Cycles and Labor Markets," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 39, pages 128-145, January.
    4. Özge Akinci, 2021. "Financial Frictions and Macro‐Economic Fluctuations in Emerging Economies," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 53(6), pages 1267-1312, September.
    5. Horvath, Jaroslav & Yang, Guanyi, 2022. "Unemployment dynamics and informality in small open economies," European Economic Review, Elsevier, vol. 141(C).
    6. Rossi, Lorenza, 2019. "The overshooting of firms’ destruction, banks and productivity shocks," European Economic Review, Elsevier, vol. 113(C), pages 136-155.
    7. Cacciatore, Matteo & Ghironi, Fabio, 2021. "Trade, unemployment, and monetary policy," Journal of International Economics, Elsevier, vol. 132(C).
    8. Fernández, Andrés & González, Andrés & Rodríguez, Diego, 2018. "Sharing a ride on the commodities roller coaster: Common factors in business cycles of emerging economies," Journal of International Economics, Elsevier, vol. 111(C), pages 99-121.
    9. Masashige Hamano & Francesco Zanetti, 2017. "Endogenous Turnover and Macroeconomic Dynamics," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 26, pages 263-279, October.
    10. Cacciatore, Matteo & Duval, Romain & Fiori, Giuseppe & Ghironi, Fabio, 2016. "Short-term pain for long-term gain: Market deregulation and monetary policy in small open economies," Journal of International Money and Finance, Elsevier, vol. 68(C), pages 358-385.
    11. Cavallari, Lilia & Romano, Simone & Naticchioni, Paolo, 2021. "The original sin: Firms’ dynamics and the life-cycle consequences of economic conditions at birth," European Economic Review, Elsevier, vol. 138(C).
    12. Stefano D’Addona & Lilia Cavallari, 2020. "External Shocks, Trade Margins, and Macroeconomic Dynamics," Economies, MDPI, vol. 8(1), pages 1-26, January.
    13. Patureau, Lise & Poilly, Céline, 2019. "Reforms and the real exchange rate: The role of pricing-to-market," Journal of International Economics, Elsevier, vol. 119(C), pages 150-168.
    14. Cacciatore, Matteo & Fiori, Giuseppe & Ghironi, Fabio, 2016. "Market deregulation and optimal monetary policy in a monetary union," Journal of International Economics, Elsevier, vol. 99(C), pages 120-137.
    15. Cavallari, Lilia & D'Addona, Stefano, 2017. "Output stabilization in fixed and floating regimes: Does trade of new products matter?," Economic Modelling, Elsevier, vol. 64(C), pages 365-383.
    16. Epstein, Brendan & Finkelstein Shapiro, Alan, 2017. "Banking and Financial Participation Reforms, Labor Markets, and Financial Shocks," MPRA Paper 88697, University Library of Munich, Germany.
    17. Michaud, Amanda & Rothert, Jacek, 2018. "Redistributive fiscal policies and business cycles in emerging economies," Journal of International Economics, Elsevier, vol. 112(C), pages 123-133.
    18. Born, Benjamin & Müller, Gernot J. & Pfeifer, Johannes & Wellmann, Susanne, 2020. "Different no more: Country spreads in advanced and emerging economies," University of Tübingen Working Papers in Business and Economics 129, University of Tuebingen, Faculty of Economics and Social Sciences, School of Business and Economics.
    19. Kamalyan, Hayk & Davtyan, Vahagn, 2022. "Exchange Rate Uncertainty and Business Cycle Fluctuations," MPRA Paper 113443, University Library of Munich, Germany.
    20. Finkelstein Shapiro, Alan & González Gómez, Andrés, 2017. "Credit market imperfections, labor markets, and leverage dynamics in emerging economies," Journal of International Money and Finance, Elsevier, vol. 78(C), pages 44-63.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:dyncon:v:154:y:2023:i:c:s016518892300115x. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jedc .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.