Credit Constraints, Equity Market Liberalizations and International Trade

Abstract

This paper provides evidence that credit constraints are an important determinant of international trade flows. I exploit shocks to the availability of external finance and examine the impact of equity market liberalizations on the export behavior of 91 countries in the 1980-1997 period. I show that liberalizations increase exports disproportionately more in financially vulnerable sectors that require more outside finance or employ fewer collateralizable assets. This result is not driven by cross-country differences in factor endowments and is independent of simultaneous trade policy reforms. Moreover, it obtains with equal strength in the full panel of countries as well as in both panel and event-study analyses of countries which removed capital controls during the sample period. Finally, the effects of liberalizations are more pronounced in economies with initially less active stock markets, indicating that foreign equity flows may substitute for an underdeveloped domestic financial system. Similarly, opening equity markets has a greater impact in the presence of higher trade costs caused by restrictive trade policies.

Keywords: international trade, credit constraints, equity market liberalization

JEL Classification: F10, F14, F36, G20, G28, G32