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Financial Choice in a Non-Ricardian Model of Trade


Katheryn Niles Russ


University of California, Davis; National Bureau of Economic Research

Diego Valderrama



July 22, 2010


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, gains from trade, and the real exchange rate in a small open economy. Increasing bank efficiency and reducing bond transaction costs have opposite effects on the extensive margin of trade, aggregate exports, and the real exchange rate. Increasing access to export markets allows firms to overcome high fixed costs of bond issuance to secure a lower marginal cost of capital, reducing prices on their goods sold both at home and abroad – a financial switching channel that is a new source of gains from trade in the Melitz framework.

Number of Pages in PDF File: 60

Keywords: heterogeneous firms, bond finance, bank finance, export, trade

JEL Classification: F12, F23, F32

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Date posted: July 23, 2010  

Suggested Citation

Russ, Katheryn Niles and Valderrama, Diego, Financial Choice in a Non-Ricardian Model of Trade (July 22, 2010). Available at SSRN: http://ssrn.com/abstract=1647311 or http://dx.doi.org/10.2139/ssrn.1647311

Contact Information

Katheryn Niles Russ (Contact Author)
University of California, Davis ( email )
One Shields Avenue
Davis, CA 95616
United States
National Bureau of Economic Research ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
No contact information is available for Diego Valderrama
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References:  36

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