Financial intermediation, trade agreements and international trade*

Using a gravity model on a data set of 69 developed and developing countries over the period 1986-2006, we show that the trade-promoting role of financial intermediation in the exporting country is mitigated when this country faces low exporting costs, that is when there is a regional trade agreement (RTA) between this country and the importing one. We also establish that this mitigating effect is reduced in financially constrained sectors, for which the role of financial intermediation remains crucial. Finally, we find evidence that the same trade-boosting effect and the same interaction with RTAs prevail for financial intermediationin the importing country.

Automated summary

The study found that the trade-promoting role of financial intermediation in the exporting country is mitigated by low exporting costs and financial constraints in certain sectors. Furthermore, the same trade-boosting effect and interaction with regional trade agreements (RTAs) were observed for financial intermediation in the importing country.