TY  - JOUR
AU  - Russ,Katheryn N.
AU  - Valderrama,Diego
TI  - Financial Choice in a Non-Ricardian Model of Trade
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 15528
PY  - 2009
Y2  - November 2009
UR  - http://www.nber.org/papers/w15528
L1  - http://www.nber.org/papers/w15528.pdf
N1  - Author contact info:
Katheryn Russ
Department of Economics
University of California, Davis
One Shields Avenue
Davis, CA 95616
Fax: 530/752-9382
E-Mail: knruss@ucdavis.edu

Diego Valderrama
4018 Cesar Chavez Street
San Francisco, CA  94131
Tel: 415-335-9694
E-Mail: dv10@cornell.edu
AB  - We join the new trade theory with a model of choice between bank and bond financing to show the differential effects of financial policy on the distribution of firm size, welfare, aggregate output, gains from trade, and the real exchange rate in a small open economy.  Increasing bank efficiency and reducing bond transaction costs both increase welfare but have opposite effects on the extensive margin of trade, aggregate exports, and the real exchange rate.  Increasing the degree of trade openness increases firms' relative demand for bond versus bank financing.  We identify a financial switching channel for gains from trade where increasing access to export markets allows firms to overcome high fixed costs of bond issuance to secure a lower marginal cost of capital.
ER  -