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Credit market frictions and trade liberalizations

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  • Brooks, Wyatt
  • Dovis, Alessandro

Abstract

Are credit frictions a barrier to gains from trade liberalization? We find that the answer to this depends on whether or not the debt limits are endogenous and respond to profit opportunities. If so, exporters expand and non-exporters shrink efficiently allowing for the same percentage gains from reform as with perfect credit markets. If debt limits do not respond, reallocation is reduced and gains are lower. We then use data from a trade liberalization to distinguish between the two models. We find that firm-level changes in export behavior, the growth of new exporters, and the capital distortions of firms that eventually exports are all consistent with a model of endogenous debt limits.

Suggested Citation

  • Brooks, Wyatt & Dovis, Alessandro, 2020. "Credit market frictions and trade liberalizations," Journal of Monetary Economics, Elsevier, vol. 111(C), pages 32-47.
    • Handle: RePEc:eee:moneco:v:111:y:2020:i:c:p:32-47
    DOI: 10.1016/j.jmoneco.2019.01.013
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    References listed on IDEAS

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    More about this item

    Keywords

    Trade liberalization; Credit frictions; Gains from trade; Limited enforcement;
    All these keywords.

    JEL classification:

    • F1 - International Economics - - Trade
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • G1 - Financial Economics - - General Financial Markets

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