Financial Choice in a Non-Ricardian Model of Trade

55 Pages Posted: 24 Nov 2009 Last revised: 7 Jun 2023

Date Written: November 2009

Abstract

We join the new trade theory with a model of choice between bank and bond financing to show the differential effects of financial policy on the distribution of firm size, welfare, aggregate output, gains from trade, and the real exchange rate in a small open economy. Increasing bank efficiency and reducing bond transaction costs both increase welfare but have opposite effects on the extensive margin of trade, aggregate exports, and the real exchange rate. Increasing the degree of trade openness increases firms' relative demand for bond versus bank financing. We identify a financial switching channel for gains from trade where increasing access to export markets allows firms to overcome high fixed costs of bond issuance to secure a lower marginal cost of capital.

Suggested Citation

Russ, Katheryn and Valderrama, Diego, Financial Choice in a Non-Ricardian Model of Trade (November 2009). NBER Working Paper No. w15528, Available at SSRN: https://ssrn.com/abstract=1510478

Katheryn Russ (Contact Author)

University of California, Davis ( email )

Department of Economics
Davis, CA 95616
United States

HOME PAGE: http://www.econ.ucdavis.edu/faculty/knruss/

No contact information is available for Diego Valderrama

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
43
Abstract Views
1,066
PlumX Metrics