Financial turmoil, external finance and UK exports

Abstract This paper empirically examines the impact of the financial dependence, specifically during the 2007–2009 financial crisis, on the UK exports using monthly data over the period January 2002 to September 2011. We find that the UK exports are highly sensitive to the fluctuation in the cost of capital. The UK tends to export relatively less in the sectors which depend more on external finance than the sectors which are relatively less dependent on external finance. We find that these effects became stronger during the 2007–2009 financial crisis. We also find that adverse credit conditions affect both the supply and demand sides of exports and play a significant role in determining the supply and demand for UK exports. We find that along with the financial conditions in the trading partners, the volume of GDP and capital labor ratio of the importing countries are the main factors in determining the demand for UK exports, whereas, the supply of UK exports is driven by financial conditions, GDP, and the capital-labor ratio of the UK.