Financial Development and International Trade

Abstract

This paper studies the industry-level and aggregate implications of �nancial development on international trade. I set up a multi-industry general equilibrium model of international trade with heterogeneous �rms subject to �nancial frictions. Industries differ in capital-intensity, which leads to differences in external �nance dependence. The model is parameterized to match key features of �rm-level data. Financial development leads to substantial reallocation of international trade shares from labor- to capital-intensive industries, with minor effects at the aggregate-level. These �ndings are consistent with estimates from cross-country industry-level and aggregate data.