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Positive and Negative Effects of Financial Development on Export Prices

Author

Listed:
  • ByeongHwa Choi

    (Indiana University)

  • Volodymyr Lugovskyy

    (Indiana University)

Abstract

We present a model of international trade in which credit constrained firms endogenously choose quality and countries differ in their level of financial development. This model produces a novel result where the total effect of financial development on export prices exhibits a U-shaped relationship with the exporter's labor productivity. The effect is positive for countries with the lowest and highest levels of productivity and negative for the countries in the middle. This occurs because financial development has two opposing effects on export prices: it reduces the costs of production while enabling costly quality upgrading. We confirm this pattern using a sample of U.S. imports from all exporters worldwide. This finding suggests that financial development has different implications for countries with different levels of productivity and income.

Suggested Citation

  • ByeongHwa Choi & Volodymyr Lugovskyy, 2015. "Positive and Negative Effects of Financial Development on Export Prices," CAEPR Working Papers 2015-020, Center for Applied Economics and Policy Research, Department of Economics, Indiana University Bloomington.
    • Handle: RePEc:inu:caeprp:2015020
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    File URL: https://caepr.indiana.edu/RePEc/inu/caeprp/caepr2015-020.pdf
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    References listed on IDEAS

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    Cited by:

    1. Andrea Ciani & Francesca Bartoli, 2020. "Export quality differentiation under credit constraints," The World Economy, Wiley Blackwell, vol. 43(5), pages 1398-1433, May.

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    More about this item

    Keywords

    Financial development; Quality; Export prices; Labor productivity;
    All these keywords.

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology

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