In line with firm-level empirical evidence which suggests a partitioning of producing firms into exporters and non-exporters I focus on situations where _<u>φx/φd</u> >_ 1 _._ Given this ordering of the production cutoffs, home entrepreneurs can be partitioned into those who do not produce ( _φ <_ _<u>φd</u>_ ), those who produce for domestic markets only <u>(</u> _<u>φd</u> ≤ φ <_ _<u>φd</u>_ ) and those who produce for export as well as domestic markets <u>(</u> _<u>φx</u> ≤ φ_ ). Similar expressions can be derived in foreign for _<u>φ</u>_<sup>_~~∗~~_</sup> _d_<sup>and</sup> _<u>φ</u>_<sup>_~~∗~~_</sup> _x_<sup>.Theaverageproductivityof</sup> � intermediate production with trade, _φT ,_ can be expressed as a weighted sum of the average productivity of domestic production, _φ_ � <u>(</u> _<u>φd</u>_ ), and export production, _φ_ � ( _<u>φx</u>_ ), where the weights take into account the relative mass of exporters to total producers and the relative level of export production (including iceberg trade costs) to domestic production for a given entrepreneur.<sup>26</sup>

# **6.2 Properties of non-symmetric financial autarky steady state equilibrium**

The symmetric case can be shown to be unique without the need for specific distributional assumptions. However, given that financial reforms in particular are undertaken in a domestic economy without the need for corresponding reforms in trading partners, it is of more interest to focus on the non-symmetric equilibrium. Following the related literature I adopt the empirically plausible Pareto distribution for the numerical solutions where _G_ ( _φ_ ) = 1 _−_ ( _φ_ min _/φ_ )<sup>_a_</sup> with _φ_ min _>_ 0 the lower-bound productivity and _a_ is the distribution shape parameter.<sup>27</sup> Under this distributional assumption the non-symmetric steady state equilibrium under financial autarky is uniquely defined.

**Proposition 2** _In financial autarky with entrepreneurial productivity following a Pareto distribution, there exists a unique steady state equilibrium with costly goods trade which can be uniquely defined by a system of thirteen equations in relative prices {w, w_<sup>_∗_</sup> _, R, R_<sup>_∗_</sup> _, RER}, domestic market production and exporting cutoffs {φd,_ _<u>φx, φ</u>_<sup>_~~∗~~_</sup> _d_<sup>_,_</sup> _<u>φ</u>_<sup>_~~∗~~_</sup> _x_<sup>_}andaggregatequanti-_</sup> _ties {Y, Y_<sup>_∗_</sup> _, B, B_<sup>_∗_</sup> _} from which all other endogenous variables can be derived. The corresponding equations are the home and foreign household euler equations, the definitions of the four productivity cutoffs, labor and credit market clearing conditions at home and abroad, the balance of payments condition (ie balanced trade given financial autarky) and the two countries’ aggregate pricing equations._

## **Proof.** See Appendix B.2.

## **6.2.1 Numerical parameter values**

In the numerical examples below I focus solely on the impact of differences in credit multipliers between countries with all other parameters identical. For the production and productivity distribution parameters I follow Bernard et al. (2007b) in setting the elasticity of substitution between different varieties _σ_ = 3 _._ 8 based on the estimates from US data of Bernard et al. (2003), the shape parameter of the Pareto distribution at

> 26See Appendix C.1 for details.

> 27 For simplicity the shape parameter _a_ is common across countries (although the lower bound productivity can be different across countries). Helpman et al. (2004) illustrate the empirical fit of the Pareto distribution and note that the assumption that _a > σ −_ 1 is required to ensure finite variances of revenues.

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