Taylor, Ashley2012-03-192012-03-192010-04-01https://hdl.handle.net/10986/3766The 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.CC BY 3.0 IGOACCESS TO FINANCEADVANCED ECONOMIESAGENCY PROBLEMSAGGREGATE DEMANDAGRICULTUREALLOCATIVE EFFICIENCYAVERAGE PRODUCTIVITYBALANCE OF PAYMENTSBANKING LAWSBANKING SECTORBANKSBENEFICIAL EFFECTSBILATERAL TRADEBORROWINGBORROWING CAPACITYBORROWING COSTSBORROWINGSCAPITAL ACCOUNTCAPITAL ACCOUNT LIBERALIZATIONCENTRALLY PLANNED ECONOMYCOLLATERALCOMPARATIVE ADVANTAGECONSUMPTION EXPENDITURECONSUMPTION LEVELSCONTRACT ENFORCEMENTCORRUPTIONCOST OF ENTRYCOST OF FINANCECOST STRUCTURECREDIT ALLOCATIONCREDIT CONSTRAINTCREDIT CONSTRAINTSCREDIT MARKETCREDIT MARKETSCREDITORCREDITORSCRISESCURRENT ACCOUNTDEBTDEBT CONTRACTSDEBT REPAYMENTSDERIVATIVEDEVELOPING ECONOMIESDIRECTED CREDITDISCOUNT RATEDOMESTIC BORROWINGDOMESTIC CREDITDOMESTIC ECONOMYDOMESTIC INTEREST RATEDOMESTIC MARKETDOMESTIC MARKETSDOMESTIC PRICEDOMESTIC PRICESDUMPINGELASTICITYELASTICITY OF SUBSTITUTIONEMERGING ECONOMIESEMERGING MARKETSENDOGENOUS VARIABLESENDOWMENTSENTREPRENEURENTREPRENEURSEQUATIONSEQUILIBRIUMEQUILIBRIUM VALUEEQUILIBRIUM VALUESEQUILIBRIUM WAGESEQUITY INVESTMENTEXCHANGE RATEEXCHANGE RATESEXPECTED UTILITYEXPENDITUREEXPORT MARKETEXPORT MARKETSEXPORTEREXPORTERSEXPORTSEXPROPRIATIONEXTERNAL FUNDSFINANCIAL CONSTRAINTSFINANCIAL DEPTHFINANCIAL DEVELOPMENTFINANCIAL HEALTHFINANCIAL INSTITUTIONSFINANCIAL LIBERALIZATIONFINANCIAL REFORMFINANCIAL REFORMSFINANCIAL SECTORFINANCIAL SECTOR DEVELOPMENTFINANCIAL SECTOR LIBERALIZATIONFINANCIAL SECTOR POLICYFINANCIAL SECTOR REFORMSFINANCIAL SECTORSFINANCIAL SYSTEMFINANCIAL SYSTEMSFIXED COSTFIXED COSTSFLOW OF FUNDSFOREIGN DIRECT INVESTMENTFOREIGN EXCHANGEFOREIGN FIRMSFOREIGN LENDERSFORM OF COLLATERALGDPGENERAL EQUILIBRIUMGLOBAL FINANCIAL SYSTEMGROSS DEBTHIDDEN INFORMATIONHOLDINGHOME COUNTRYHOME CREDITHOST ECONOMIESHOUSEHOLD SAVINGHOUSEHOLD SAVINGSHOUSEHOLDSHUMAN CAPITALINCOMEINCOME EFFECTINDUSTRIAL ECONOMIESINEFFICIENCYINTEREST RATEINTEREST RATE CEILINGSINTEREST RATESINTERNAL FUNDSINTERNATIONAL BANKINTERNATIONAL FINANCEINTERNATIONAL TRADEINVESTMENT CHOICEINVESTMENT CHOICESINVESTMENT DECISIONSINVESTMENT OPTIONSINVESTMENT PATTERNSINVESTMENT PROJECTSINVESTOR PROTECTIONLABOR COSTSLABOR DEMANDLABOR MARKETLABOR MARKETSLABOR PRODUCTIVITYLABOR SUPPLYLACK OF INFORMATIONLEGAL SYSTEMSLENDERSLIBERALIZATION OF INTERESTLIQUIDITYMACROECONOMIC EFFECTSMARGINAL BENEFITSMARGINAL COSTMARGINAL PRODUCTSMARKET EQUILIBRIUMMONOPOLISTIC COMPETITIONMORAL HAZARDMOTIVATIONMULTIPLIERSNET EXPORTSNET WORTHOPTIMAL INVESTMENTOUTPUTSPERFECT COMPETITIONPOLICY RESPONSEPOLITICAL ECONOMYPOSITIVE EFFECTSPREFERENTIAL ACCESSPRICE CHANGESPRIVATE BANKSPRODUCTION COSTSPRODUCTION FUNCTIONPRODUCTION FUNCTIONSPRODUCTIVITYPROFIT MAXIMIZATIONPRUDENTIAL SUPERVISIONRATE OF RETURNREAL EXCHANGE RATEREAL INTERESTREAL INTEREST RATEREAL WAGESREPAYMENTRESOURCE ALLOCATIONRETURNSSAVINGSSECURITIESSECURITIES MARKETSSELF-FINANCESOLVENCYTANGIBLE ASSETSTARIFF BARRIERSTOTAL FACTOR PRODUCTIVITYTRADE BARRIERSTRADE LIBERALIZATIONTRADE POLICYTRADE REFORMSTRADINGTRANSACTIONTRANSACTION COSTSTRANSFER OF OWNERSHIPTRANSITION ECONOMIESUNIONVALUE ADDEDVALUE OF OUTPUTVARIABLE COSTWAGESWEALTHWORLD ECONOMYWTOWorld Bank10.1596/1813-9450-5279