Trade Shocks and Credit Reallocation

68 Pages Posted: 25 Aug 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: July 28, 2020

Abstract

This paper shows that there are endogenous financial constraints arising from trade liberalization. We find that banks with a high share of loans to firms exposed to competition from China experience an increase in non-performing loans and a reduction in their credit capacity. The drop in credit supply affects both firms directly exposed to import-competition from China and firms 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 holds back the reallocation of factors of production between firms and sectors, which is crucial to the welfare implication of trade liberalization.

Keywords: trade liberalisation, China shock, bank credit, resource reallocation, gains from trade

JEL Classification: F10, F14, F65, G21

Suggested Citation

Federico, Stefano and Hassan, Fadi and Rappoport, Veronica, Trade Shocks and Credit Reallocation (July 28, 2020). Bank of Italy Temi di Discussione (Working Paper) No. 1289, Available at SSRN: https://ssrn.com/abstract=3680591 or http://dx.doi.org/10.2139/ssrn.3680591

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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