Working Paper Revision
No Credit, No Gain: Trade Liberalization Dynamics, Production Inputs, and Financial Development
Abstract: We study the role of financial development on the aggregate implications of reducing import tariffs on capital and intermediate inputs. We document empirically that financially underdeveloped economies feature a slower aggregate response following trade liberalization. To quantify these effects, we set up a general equilibrium model with heterogeneous firms subject to collateral constraints and estimate it using Colombian plant-level data. We find that low financial development substantially limited the gains from trade liberalization in Colombia in the early 1990s. More broadly, we find that low financial development substantially limits both the aggregate and welfare gains from tariff reductions.
Keywords: financial development; trade liberalization; welfare; production inputs;
https://doi.org/10.20955/wp.2020.038
Status: Published in International Economic Review
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Bibliographic Information
Provider: Federal Reserve Bank of St. Louis
Part of Series: Working Papers
Publication Date: 2022-09
Number: 2020-038
Note: Publisher DOI: https://doi.org/10.1111/iere.12620
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