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Financial choice and international trade

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  • Cho, Ilhyun
  • Contessi, Silvio
  • Russ, Katheryn N.
  • Valderrama, Diego

Abstract

Motivated by existing and new stylized facts, we join the new trade theory with a model of choice between bank and bond financing to show the differential effects of financial policy on the distribution of firm size, gains from trade, and the real exchange rate in a small open economy. Increasing bank efficiency and reducing bond transaction costs have opposite effects on the extensive margin of trade, aggregate exports, and the real exchange rate. Increasing access to export markets generates a financial switching channel for gains from trade, allowing firms to overcome high fixed costs of bond issuance to secure a lower marginal cost of capital.

Suggested Citation

  • Cho, Ilhyun & Contessi, Silvio & Russ, Katheryn N. & Valderrama, Diego, 2019. "Financial choice and international trade," Journal of Economic Behavior & Organization, Elsevier, vol. 157(C), pages 297-319.
    • Handle: RePEc:eee:jeborg:v:157:y:2019:i:c:p:297-319
    DOI: 10.1016/j.jebo.2017.12.008
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    4. Dong, Weijian & Chen, Kanxiang & Liu, Xiaojun, 2023. "Role of regional trade agreements in enhancing investments in mineral resources projects in ASEAN," Resources Policy, Elsevier, vol. 85(PB).
    5. Sèna Kimm Gnangnon, 2022. "Financial development and tax revenue in developing countries: investigating the international trade channel," SN Business & Economics, Springer, vol. 2(1), pages 1-26, January.
    6. Unger, Florian, 2023. "Financial Development and Export Concentration," VfS Annual Conference 2023 (Regensburg): Growth and the "sociale Frage" 277570, Verein für Socialpolitik / German Economic Association.
    7. Bunje, Madinatou Yeh & Abendin, Simon & Wang, Yin, 2022. "The multidimensional effect of financial development on trade in Africa: The role of the digital economy," Telecommunications Policy, Elsevier, vol. 46(10).
    8. Gnangnon, Sèna Kimm, 2019. "Financial Development and Tax Revenue in Developing Countries: Investigating the International Trade and Economic Growth Channels," EconStor Preprints 206628, ZBW - Leibniz Information Centre for Economics.

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    More about this item

    Keywords

    Financial choice; Heterogeneous firms; Margins of trade; Corporate debt; Trade liberalization; Financial development;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • F65 - International Economics - - Economic Impacts of Globalization - - - Finance

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