NO CREDIT, NO GAIN: TRADE LIBERALIZATION DYNAMICS, PRODUCTION INPUTS, AND FINANCIAL DEVELOPMENT

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...

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Bibliographic Details
Published inInternational economic review (Philadelphia) Vol. 64; no. 2; pp. 809 - 836
Main Authors Kohn, David, Leibovici, Fernando, Szkup, Michal
Format Journal Article
LanguageEnglish
Published Philadelphia Blackwell Publishing Ltd 01.05.2023
Subjects
Capital
Credit
Economic development
Economic theory
Equilibrium
Free trade
Tariffs
Trade liberalization
Welfare
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ISSN0020-6598
1468-2354
DOI10.1111/iere.12620

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Summary: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.
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ISSN:0020-6598
1468-2354
DOI:10.1111/iere.12620