Financial Constraints and International Trade Patterns

Abstract:     
Growing empirical literature shows that financial constraints are reduce the chance of exporting, suggesting that financial constraints are an important determinant of international trade patterns. In this aspect, I develop a model of international trade based on new trade theory with financial constraints and non-homothetic preferences. With these two modified assumptions, the main findings are i) financial constraints act as trade barriers, ii) the largest amount of trade is between countries that have healthier financial systems in terms of access to loans, iii) financial constraints can cause one-way or zero trade. As a result, this paper provides a single framework able to account for all possible patterns (two-way, one-way, and no trade) within the same industry. All these findings have important policy implications for countries suffering from relatively poor financial systems.

Number of Pages in PDF File: 11

Keywords: financial constraints, international trade patterns, liquidity constraints

JEL Classification: F10, F12, F36, G20, G32

working papers series