Cross-border trade credit and trade flows during the global financial crisis

Cross-border trade credit is credit extended by both exporters and importers and constitutes a considerable share of the trade finance instruments used in global trade. We use quarterly data on cross-border trade credit recorded in the International Investment Position at the International Monetary Fund and examine its effects on trade flows during the 2008–09 global financial crisis. Unlike previous studies, we find that the effects on real imports are positive on average, and that these effects are more pronounced during the crisis. Specifically, we find that a decrease in trade credit explains approximately 6% of the trade collapse during the crisis. Finally, the results show that the effects of trade credit on exports are more pronounced during the crisis in countries with a low level of financial development in the pre-crisis period.