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Credit Market Quality, Innovation and Trade

Using a general equilibrium model with private R&D financing, we investigate the impact of trade openness on innovation, trade patterns and welfare for two countries that are equal in all aspects except for the quality of their credit markets. We show that trade openness increases innovation only in the country with the better credit market, while it has a negative impact on innovation when credit markets are less developed. With respect to trade patterns, the country with the worse credit market imports high-tech goods and exports traditional goods. In terms of welfare, opening to trade may lower the welfare of individuals in the short run, but in the long run, all of them are better off under free trade than if they were under autarky.

Author - Christina Terra and Enrico Vasconcelos
Journal - Revue économique

Source - https://www.jstor.org/stable/26956209