Financial Frictions and Trade Dynamics

Abstract

The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

Trade and credit: Revisiting the evidence

“…In contrast to previous studies, Paravisini et al (2015) find no effect of financial shocks on the extensive margin of exports during the 2008-2009 financial crisis once they account for demand by including product-destination-time fixed effects in exports regressions. This finding implies that a credit shortage involves shocks to working capital but not to sunk entry costs at the product-country level, which somehow contradicts the theoretical predictions in Kohn et al (2016) and Bergin et al (2018).…”

“…From a theoretical viewpoint financial shocks are expected to distort firms' export decisions along the extensive margin both through intensive margins of exports, i.e. finance of working capital needed in order to enter to a market or to keep exporting, and through the direct funding of physical investment (see, e.g., Bergin et al, 2018). Section 5 has shown the relevance of the working capital channel.…”

“…Kohn et al (2016) show that in a model of international trade with a borrowing constraint and working capital requirements, 1 negative financing shocks force firms to produce below their optimal scale, thus distorting not only the intensive but also the extensive margin by reducing the expected returns from exporting to a particular market. Alternatively, Bergin et al (2018) illustrate how lending shocks lead firms to alter their capital structure from debt to more expensive equity financing, which implicitly raises the effective cost of financing the sunk cost of entering new export markets. 2 On the empirical front, several studies provide support to these theoretical predictions.…”

Trade and Credit: Revisiting the Evidence

“…In contrast to previous studies, Paravisini et al (2015) find no effect of financial shocks on the extensive margin of exports during the 2008-09 financial crisis once they account for demand by including product-destination-time fixed effects in exports regressions. This finding implies that a credit shortage involves shocks to working capital but not to sunk entry costs at the product-country level, which somehow contradicts the theoretical predictions in Kohn et al (2016) and Bergin et al (2018).…”

“…Alternatively, Bergin et al (2018) illustrate how lending shocks lead firms to alter their capital structure from debt to more expensive equity financing, which implicitly raises the effective cost of financing the sunk cost of entering new export markets. 2 On the empirical front, several studies provide support to these theoretical predictions.…”