Trade Shocks and Credit Reallocation (joint with Stefano Federico e Veronica Rappoport)
Abstract:
The effec t of trade liberalization on welfare and economic activity remains one of t he most important questions in economics. The literature identifies a numbe r of key determinants that reduce the potential gains from trade, by focusi ng on frictions to labor mobility across regions or sectors. This paper con tributes to this debate by exploring a novel channel, namely the reallocati on of credit across sectors in the aftermath of a trade shock. Our results suggest that there are endogenous financial frictions that arise from trade liberalization as, given the portfolio of firms they lend to, banks can be negatively affected by a trade shock. Using data from the Italian credit r egistry, matched with bank and firm level data, we follow the evolution of the bank and firm activities across sectors and regions prior to and after the entry of China into the WTO. We identify the sectors most affected by i mport competition from China and estimate the transmission of this trade sh ock from firms to their lending banks, and the consequence of the shock on banks' lending to other firms. We find that, controlling for credit demand, banks exposed to the China shock decrease their lending relative to non-ex posed banks. Importantly, this lending is reduced both for firms exposed an d those non-exposed to competition from China. The main mechanism is relate d to the reduction of the core capital of banks, and their resulting fundin g capacity, through the rise of non-performing loans. We quantify the impac t of this effect on real outcomes such as output, investment, and employmen t. We find relevant aggregate effects such that employment would have been between 1.2 and 3.0 higher if these financial frictions were less binding.
DTSTAMP:20260405T051233Z DTSTART:20190515T130000Z DTEND:20190515T140000Z SEQUENCE:0 TRANSP:OPAQUE END:VEVENT END:VCALENDAR