Trade And Financial Sector Reforms: Interactions And Spillovers

Date Added: Apr 2010
Format: PDF

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, the author adds two-way linkages between firms' production and exporting decisions and their financial constraints to a general equilibrium heterogeneous firm trade model.