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A Theory of Domestic and International Trade Finance

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  • JaeBin Ahn

Abstract

This paper provides a theory model of trade finance to explain the "great trade collapse." The model shows that, first, the riskiness of international transactions rises relative to domestic transactions during economic downturns, and second, the exclusive use of a letter of credit in international transactions exacerbates a collapse in trade during a financial crisis. The basic model considers banks'' optimal screening decisions in the presence of counterparty default risks. In equilibrium, banks will maintain a higher precision screening test for domestic firms and a lower precision screening test for foreign firms, which constitutes the main mechanism of the model.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 11/262.

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Length: 35
Date of creation: 01 Nov 2011
Date of revision:
Handle: RePEc:imf:imfwpa:11/262

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Keywords: Banks; Economic models; Payment systems; screening; credit; payment system; counterparty; counterpart; prices; collateral; third parties;

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References

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Citations

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Cited by:
  1. Eck, Katharina & Engemann, Martina & Schnitzer, Monika, 2012. "How Trade Credits Foster International Trade," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University 379, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  2. Nicolas Berman & José de Sousa & Philippe Martin & Thierry Mayer, 2012. "Time to ship during financial crises," Working Papers 2012-25, CEPII research center.
  3. Rudolfs Bems & Robert C. Johnson & Kei-Mu Yi, 2012. "The Great Trade Collapse," NBER Working Papers 18632, National Bureau of Economic Research, Inc.
  4. Tim Schmidt-Eisenlohr, 2009. "Towards a Theory of Trade Finance," Economics Working Papers, European University Institute ECO2009/43, European University Institute.
  5. Andreas Hoefele & Tim Schmidt-Eisenlohr & Zihong Yu, 2013. "Payment Choice in International Trade: Theory and Evidence from Cross-country Firm Level Data," Discussion Paper Series, Department of Economics, Loughborough University 2013_11, Department of Economics, Loughborough University, revised Oct 2013.
  6. Niepmann, Friederike, 2013. "No guarantees, no trade: how banks affect export patterns," Staff Reports, Federal Reserve Bank of New York 659, Federal Reserve Bank of New York.
  7. Antràs, Pol & Foley, C. Fritz, 2011. "Poultry in Motion: A Study of International Trade Finance Practices," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8422, C.E.P.R. Discussion Papers.
  8. Zheng, J., 2012. "Essays on pensions, health expectancy and credit insurance," Open Access publications from Tilburg University, Tilburg University urn:nbn:nl:ui:12-5661243, Tilburg University.
  9. Independent Evaluation Group, 2013. "Evaluation of the International Finance Corporation's Global Trade Finance Program, 2006-12," World Bank Publications, The World Bank, number 15769, August.
  10. Friederike Niepmann & Tim Schmidt-Eisenlohr, 2013. "Banks in international trade finance: evidence from the U.S," Staff Reports, Federal Reserve Bank of New York 633, Federal Reserve Bank of New York.

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