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Off the Cliff and Back? Credit Conditions and International Trade during the Global Financial Crisis

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  • Davin Chor

    ()
    (School of Economics, Singapore Management University)

  • Kalina Manova

    ()
    (Department of Economics, Stanford University)

Abstract

We study the collapse of international trade flows during the global financial crisis using detailed data on monthly US imports during this period. We show that adverse credit conditions were an important channel through which the crisis affected trade volumes. We identify the impact of credit tightening by exploiting the variation in the cost of capital across countries and over time, as well as the variation in financial dependence across sectors. Countries with higher interbank rates and thus tighter credit markets exported less to the US during the peak of the crisis. These effects were especially pronounced in sectors that require extensive external financing, have few collateralizable assets, or have limited access to trade credit. Exports of financially dependent industries were thus more sensitive to the cost of external capital than exports of less dependent industries, and this sensitivity rose during the financial crisis. The quantitative implications of our estimates for trade volumes highlight the large real effects of financial crises and the potential gains from policy intervention.

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Bibliographic Info

Paper provided by Singapore Management University, School of Economics in its series Working Papers with number 08-2010.

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Date of creation: Jul 2010
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Publication status: Published in SMU Economics and Statistics Working Paper Series
Handle: RePEc:siu:wpaper:08-2010

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Keywords: international trade; financial crisis; credit constraints; trade finance; trade credit;

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