Trade and Financial Sector Reforms : Interactions and Spillovers

The allocation of production across firms is a potentially important explanation of the productivity gap between rich and poor economies. Reforms to trade policy and the domestic financial sector are often both key elements of policy packages aimed at reducing productive distortions. However, the impact of each reform in reallocating production within an economy is usually analyzed independently. This paper asks how do such general equilibrium effects of trade and domestic financial sector reforms interact in terms of their effects on productivity, wages and utility. Motivated by recent firm-level studies, I add two-way linkages between firms production and exporting decisions and their financial constraints to a general equilibrium heterogeneous firm trade model. The interaction effects between reforms appear qualitatively important. Trade and domestic financial sector reforms have complementary effects on the average productivity and size of domestic producers. However, if much reallocative work has already been done through a well-functioning financial sector, the marginal benefits of trade liberalisation for wages and household utility are reduced. Improvements in the ability to use exports as pledgeable collateral enhance both the wage and productivity effects of trade reforms. The model also highlights the potential for financial sector reforms in one economy to be exported via the trade channel, affecting decisions to produce or export in the foreign economy and putting downward pressure on foreign real wages.

Bibliographic Details

Main Author:	Taylor, Ashley
Language:	English
Published:	2010-04-01
Subjects:	ACCESS TO FINANCE, ADVANCED ECONOMIES, AGENCY PROBLEMS, AGGREGATE DEMAND, AGRICULTURE, ALLOCATIVE EFFICIENCY, AVERAGE PRODUCTIVITY, BALANCE OF PAYMENTS, BANKING LAWS, BANKING SECTOR, BANKS, BENEFICIAL EFFECTS, BILATERAL TRADE, BORROWING, BORROWING CAPACITY, BORROWING COSTS, BORROWINGS, CAPITAL ACCOUNT, CAPITAL ACCOUNT LIBERALIZATION, CENTRALLY PLANNED ECONOMY, COLLATERAL, COMPARATIVE ADVANTAGE, CONSUMPTION EXPENDITURE, CONSUMPTION LEVELS, CONTRACT ENFORCEMENT, CORRUPTION, COST OF ENTRY, COST OF FINANCE, COST STRUCTURE, CREDIT ALLOCATION, CREDIT CONSTRAINT, CREDIT CONSTRAINTS, CREDIT MARKET, CREDIT MARKETS, CREDITOR, CREDITORS, CRISES, CURRENT ACCOUNT, DEBT, DEBT CONTRACTS, DEBT REPAYMENTS, DERIVATIVE, DEVELOPING ECONOMIES, DIRECTED CREDIT, DISCOUNT RATE, DOMESTIC BORROWING, DOMESTIC CREDIT, DOMESTIC ECONOMY, DOMESTIC INTEREST RATE, DOMESTIC MARKET, DOMESTIC MARKETS, DOMESTIC PRICE, DOMESTIC PRICES, DUMPING, ELASTICITY, ELASTICITY OF SUBSTITUTION, EMERGING ECONOMIES, EMERGING MARKETS, ENDOGENOUS VARIABLES, ENDOWMENTS, ENTREPRENEUR, ENTREPRENEURS, EQUATIONS, EQUILIBRIUM, EQUILIBRIUM VALUE, EQUILIBRIUM VALUES, EQUILIBRIUM WAGES, EQUITY INVESTMENT, EXCHANGE RATE, EXCHANGE RATES, EXPECTED UTILITY, EXPENDITURE, EXPORT MARKET, EXPORT MARKETS, EXPORTER, EXPORTERS, EXPORTS, EXPROPRIATION, EXTERNAL FUNDS, FINANCIAL CONSTRAINTS, FINANCIAL DEPTH, FINANCIAL DEVELOPMENT, FINANCIAL HEALTH, FINANCIAL INSTITUTIONS, FINANCIAL LIBERALIZATION, FINANCIAL REFORM, FINANCIAL REFORMS, FINANCIAL SECTOR, FINANCIAL SECTOR DEVELOPMENT, FINANCIAL SECTOR LIBERALIZATION, FINANCIAL SECTOR POLICY, FINANCIAL SECTOR REFORMS, FINANCIAL SECTORS, FINANCIAL SYSTEM, FINANCIAL SYSTEMS, FIXED COST, FIXED COSTS, FLOW OF FUNDS, FOREIGN DIRECT INVESTMENT, FOREIGN EXCHANGE, FOREIGN FIRMS, FOREIGN LENDERS, FORM OF COLLATERAL, GDP, GENERAL EQUILIBRIUM, GLOBAL FINANCIAL SYSTEM, GROSS DEBT, HIDDEN INFORMATION, HOLDING, HOME COUNTRY, HOME CREDIT, HOST ECONOMIES, HOUSEHOLD SAVING, HOUSEHOLD SAVINGS, HOUSEHOLDS, HUMAN CAPITAL, INCOME, INCOME EFFECT, INDUSTRIAL ECONOMIES, INEFFICIENCY, INTEREST RATE, INTEREST RATE CEILINGS, INTEREST RATES, INTERNAL FUNDS, INTERNATIONAL BANK, INTERNATIONAL FINANCE, INTERNATIONAL TRADE, INVESTMENT CHOICE, INVESTMENT CHOICES, INVESTMENT DECISIONS, INVESTMENT OPTIONS, INVESTMENT PATTERNS, INVESTMENT PROJECTS, INVESTOR PROTECTION, LABOR COSTS, LABOR DEMAND, LABOR MARKET, LABOR MARKETS, LABOR PRODUCTIVITY, LABOR SUPPLY, LACK OF INFORMATION, LEGAL SYSTEMS, LENDERS, LIBERALIZATION OF INTEREST, LIQUIDITY, MACROECONOMIC EFFECTS, MARGINAL BENEFITS, MARGINAL COST, MARGINAL PRODUCTS, MARKET EQUILIBRIUM, MONOPOLISTIC COMPETITION, MORAL HAZARD, MOTIVATION, MULTIPLIERS, NET EXPORTS, NET WORTH, OPTIMAL INVESTMENT, OUTPUTS, PERFECT COMPETITION, POLICY RESPONSE, POLITICAL ECONOMY, POSITIVE EFFECTS, PREFERENTIAL ACCESS, PRICE CHANGES, PRIVATE BANKS, PRODUCTION COSTS, PRODUCTION FUNCTION, PRODUCTION FUNCTIONS, PRODUCTIVITY, PROFIT MAXIMIZATION, PRUDENTIAL SUPERVISION, RATE OF RETURN, REAL EXCHANGE RATE, REAL INTEREST, REAL INTEREST RATE, REAL WAGES, REPAYMENT, RESOURCE ALLOCATION, RETURNS, SAVINGS, SECURITIES, SECURITIES MARKETS, SELF-FINANCE, SOLVENCY, TANGIBLE ASSETS, TARIFF BARRIERS, TOTAL FACTOR PRODUCTIVITY, TRADE BARRIERS, TRADE LIBERALIZATION, TRADE POLICY, TRADE REFORMS, TRADING, TRANSACTION, TRANSACTION COSTS, TRANSFER OF OWNERSHIP, TRANSITION ECONOMIES, UNION, VALUE ADDED, VALUE OF OUTPUT, VARIABLE COST, WAGES, WEALTH, WORLD ECONOMY, WTO,
Online Access:	http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20100423141314 https://hdl.handle.net/10986/3766
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