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Financial Development and International Trade

This paper studies the industry-level and aggregate implications of fi nancial development on international trade. I set up a multi-industry general equilibrium model of international trade with heterogeneous fi rms subject to fi nancial frictions. Industries differ in capital-intensity, which leads to differences in external fi nance dependence. The model is parameterized to match key features of fi rm-level data. Financial development leads to substantial reallocation of international trade shares from labor- to capital-intensive industries, with minor effects at the aggregate-level. These fi ndings are consistent with estimates from cross-country industry-level and aggregate data.

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https://doi.org/10.20955/wp.2018.015


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