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N° 2010-09 |
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| April 2010 |
| The Distorted Effect of Financial Development on International Trade Flows |
| Antoine Berthou |
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| This paper investigates the effects of financial development on the intensive and extensive margins of
countries exports, at different stages of economic development. The paper develops a partial equilibrium
model with monopolistic competition. In this model, firms are heterogeneous in terms of productivity
and have access to external liquidity. The effect of financial development on the intensive and
extensive margins of countries exports is predicted to be positive, especially in sectors with a higher
demand for external finance. In countries with poor financial institutions though, only the most productive
firms benefit from an increased access to financial resources and start exporting, with little effect on
aggregate exports. The effect of financial development on exports is therefore higher for a better initial
development of financial institutions. The empirical analysis confirms that financial development promotes
both the intensive and extensive margins of countries’ exports. This is more the case in industries
with a higher demand for external finance. Though, more than 60% of the effect of financial development
channels through the intensive margin. In industries where the demand for external finance is
high, the effect of financial development is the highest in economies characterized by an intermediate
development of financial institutions, and the lowest in countries with poor or advanced financial institutions.
This contradicts the traditional expectation that financial development benefits more in terms
of exports to countries where financial constraints are the most binding. |
Non-technical summary  |
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Résumé
non-technique
en français |
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| Full text |
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| Bilateral trade; trade margins; financial development |
Keywords |
| F12, G20, O16 |
JEL classification |
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