DP13375 Trade and Credit Reallocation: How Banks Help Shape Comparative Advantage

Author(s):	Christian Keuschnigg, Michael Kogler
Publication Date:	December 2018
Date Revised:	December 2018
Keyword(s):	Banking, capital reallocation, comparative advantage, Trade
JEL(s):	F10, G21, G28
Programme Areas:	Public Economics, International Trade and Regional Economics
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=13375

Trade and innovation cause structural change. Productive factors must flow from declining to growing industries. Banks play a major role in cutting credit to non-viable firms in downsizing sectors and in providing new credit to finance investment in expanding, innovative sectors. Structural parameters of a country's banking system thus influence comparative advantage and trade, and can magnify the gains from trade liberalization. The analysis shows how insolvency laws, minimum capital standards, and cost of bank equity determine credit reallocation, sectoral expansion and trade patterns.