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Financial Frictions and Trade Dynamics

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  • Paul Bergin
  • Ling Feng
  • Ching-Yi Lin

Abstract

This paper demonstrates theoretically that a financial shock can have very persistent effects on international trade. Motivation is taken from the aftermath of the dramatic trade collapse in 2008-9, which despite a substantial recovery, has left a persistently slower growth rate in trade. We find conditions under which a transitory financial shock significantly reduces the investment by firms in entering the export market, and that this can have long-lasting effects on the range of goods exported and hence overall trade. Important to our mechanism are endogenous capital structure decisions by firms in response to the financial shock, and firm entry investment that requires traded goods. This mechanism provides an example of how firm dynamics can serve as a potent propagation mechanism, generating very long-lasting effects of transitory macroeconomic shocks.

Suggested Citation

  • Paul Bergin & Ling Feng & Ching-Yi Lin, 2018. "Financial Frictions and Trade Dynamics," NBER Working Papers 24503, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:24503
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    Cited by:

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    2. Eduardo Gutiérrez & Enrique Moral-Benito, 2019. "Trade and credit: revisiting the evidence," Working Papers 1901, Banco de España.

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    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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