Trade Shocks and Credit Reallocation

62 Pages Posted: 28 May 2020

See all articles by Stefano Federico

Stefano Federico

Bank of Italy

Fadi Hassan

Bank of Italy

Veronica Rappoport

London School of Economics & Political Science (LSE)

Multiple version iconThere are 2 versions of this paper

Date Written: May 2020

Abstract

This paper shows that there are endogenous financial constraints arising from trade liberalization. Banks with a large share of loans on firms exposed to competition from China suffer an increase in non-performing loans and reduce their credit capacity. The drop in credit supply affects both firms directly exposed to import-competition from China, and firm expected to expand upon trade liberalization, with economically relevant implications in terms of employment, investment, and output. This financial spillover between losers and winners from trade retards the reallocation of factors of production between firms and sectors, crucial to the welfare implication of trade liberalization.

JEL Classification: F61, F62, G21

Suggested Citation

Federico, Stefano and Hassan, Fadi and Rappoport, Veronica, Trade Shocks and Credit Reallocation (May 2020). CEPR Discussion Paper No. DP14792, Available at SSRN: https://ssrn.com/abstract=3612861

Stefano Federico (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Fadi Hassan

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Veronica Rappoport

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

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