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The Private Credit Insurance Effect on Trade

  • Koen van der Veer

International trade relies on trade finance (credit or insurance) by financial institutions. Data limitations, however, have made it difficult to quantify the impact of changes in the supply of trade finance on trade. This paper is the first to establish a causal link between the supply of private credit insurance and exports. I overcome endogeneity issues by using a unique bilateral data set which covers the activities from 1992 to 2006 of one of the world's leading private credit insurers. This database enables me to use the insurer's claim ratio - a primary determinant of the supply of credit insurance - as an instrument for insured exports. Subsequently, applying the method of instrumental variables and a variety of trade models, I consistently find a positive and statistically significant effect of private credit insurance on exports. The estimates are economically relevant and suggest that, depending on the decline in the supply of private credit insurance during the 2008-09 international trade collapse, the reduction in private insurance exposure explains about 5 to 9 percent of the drop in world exports and 10 to 20 percent of the drop in European exports.

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File URL: http://www.dnb.nl/binaries/264%20-%20The%20Private%20Credit%20Insurance%20Effect%20on%20Trade_tcm46-240647.pdf
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Paper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 264.

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Date of creation: Oct 2010
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Handle: RePEc:dnb:dnbwpp:264
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Web page: http://www.dnb.nl/en/

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  1. Tim Schmidt-Eisenlohr, 2009. "Towards a Theory of Trade Finance," Economics Working Papers ECO2009/43, European University Institute.
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