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International Trade and Letters of Credit: A Double-Edged Sword in Times of Crises

Author

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  • Matthieu Crozet

    (RITM - Réseaux Innovation Territoires et Mondialisation - Université Paris-Saclay)

  • Banu Demir
  • Beata Javorcik

Abstract

This study argues that the ability to mitigate risks associated with international trade is particularly important at times of heightened uncertainty, such as the economic crisis caused by the Covid-19 pandemic. Risk mitigation can be achieved through letters of credit (LCs), trade finance instruments providing guarantees to trading partners. As their use varies across products, exports of some products are more resilient than others during times of increased uncertainty. This situation reverses in times of financial crises when distressed banks may limit the supply of LCs. Our analysis using data on US and EU-15 exports during the Covid crisis and the Global Financial Crisis provides empirical support for these hypotheses.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Matthieu Crozet & Banu Demir & Beata Javorcik, 2022. "International Trade and Letters of Credit: A Double-Edged Sword in Times of Crises," Post-Print hal-04150301, HAL.
    • Handle: RePEc:hal:journl:hal-04150301
    DOI: 10.1057/s41308-021-00155-3
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    Cited by:

    1. Cristina Constantinescu & Ana Margarida Fernandes & Arti Grover & Stavros Poupakis & Santiago Reyes, 2022. "Globally Engaged Firms in the Covid-19 Crisis," CESifo Working Paper Series 9711, CESifo.
    2. Marc Auboin & Eddy Bekkers & Dario De Quarti, 2023. "A Novel Framework to Evaluate Changes in Access to and Costs of Trade Finance," CESifo Working Paper Series 10445, CESifo.
    3. Luis Alberto Geraldo-Campos & Juan J. Soria & Tamara Pando-Ezcurra, 2022. "Machine Learning for Credit Risk in the Reactive Peru Program: A Comparison of the Lasso and Ridge Regression Models," Economies, MDPI, vol. 10(8), pages 1-21, July.
    4. Auboin, Marc & Bekkers, Eddy & De Quarti, Dario, 2023. "A novel framework to evaluate changes in access to and costs of trade finance," WTO Staff Working Papers ERSD-2023-01, World Trade Organization (WTO), Economic Research and Statistics Division.
    5. Ricardo Correa & Julian di Giovanni & Linda S. Goldberg & Camelia Minoiu, 2023. "Trade Uncertainty and U.S. Bank Lending," International Finance Discussion Papers 1383, Board of Governors of the Federal Reserve System (U.S.).

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    More about this item

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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