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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.

Suggested Citation

  • JaeBin Ahn, 2011. "A Theory of Domestic and International Trade Finance," IMF Working Papers 11/262, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:11/262
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    Cited by:

    1. Eck, Katharina & Engemann, Martina & Schnitzer, Monika, 2012. "How Trade Credits Foster International Trade," CEPR Discussion Papers 8954, C.E.P.R. Discussion Papers.
    2. Claessens, Stijn & Hassib, Omar & Van Horen, Neeltje, 2017. "The Role of Foreign Banks in Trade," CEPR Discussion Papers 11821, C.E.P.R. Discussion Papers.
    3. Schmidt-Eisenlohr, Tim, 2013. "Towards a theory of trade finance," Journal of International Economics, Elsevier, vol. 91(1), pages 96-112.
    4. Friederike Niepmann & Tim Schmidt-Eisenlohr, 2013. "Banks in international trade finance: evidence from the U.S," Staff Reports 633, Federal Reserve Bank of New York.
    5. Niepmann, Friederike & Schmidt-Eisenlohr, Tim, 2017. "No guarantees, no trade: How banks affect export patterns," Journal of International Economics, Elsevier, vol. 108(C), pages 338-350.
    6. Auboin, Marc & Engemann, Martina, 2013. "Trade finance in periods of crisis: What have we learned in recent years?," WTO Staff Working Papers ERSD-2013-01, World Trade Organization (WTO), Economic Research and Statistics Division.
    7. Türkcan Kemal & Avsar Veysel, 2016. "Investigating the Role of Contract Enforcement and Financial Costs on the Payment Choice: Industry-Level Evidence from Turkey," Global Economy Journal, De Gruyter, vol. 16(1), pages 135-160, March.
    8. Nicolas Berman & José de Sousa & Philippe Martin & Thierry Mayer, 2013. "Time to Ship during Financial Crises," NBER International Seminar on Macroeconomics, University of Chicago Press, vol. 9(1), pages 225-260.
    9. Mateut, Simona, 2014. "Reverse trade credit or default risk? Explaining the use of prepayments by firms," Journal of Corporate Finance, Elsevier, vol. 29(C), pages 303-326.
    10. Goldbach, Stefan & Nitsch, Volker, 2015. "Cutting the credit line: Evidence from Germany," Discussion Papers 25/2015, Deutsche Bundesbank.
    11. Andreas Hoefele & Tim Schmidt-Eisenlohr & Zhihong Yu, 2016. "Payment choice in international trade: Theory and evidence from cross-country firm-level data," Canadian Journal of Economics, Canadian Economics Association, vol. 49(1), pages 296-319, February.
    12. A. Berthou & G. Horny & J-S. Mésonnier, 2018. "Dollar Funding and Firm-Level Exports," Working papers 666, Banque de France.
    13. Niepmann, Friederike & Schmidt-Eisenlohr, Tim, 2017. "International trade, risk and the role of banks," Journal of International Economics, Elsevier, vol. 107(C), pages 111-126.
    14. David Kohn & Fernando Leibovici & Michal Szkup, 2016. "Financial Frictions And New Exporter Dynamics," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 57, pages 453-486, May.
    15. Pol Antràs & C. Fritz Foley, 2015. "Poultry in Motion: A Study of International Trade Finance Practices," Journal of Political Economy, University of Chicago Press, vol. 123(4), pages 853-901.
    16. Auboin, Marc & DiCaprio, Alisa, 2016. "Why do trade finance gaps persist: Does it matter for trade and development?," WTO Staff Working Papers ERSD-2017-01, World Trade Organization (WTO), Economic Research and Statistics Division.
    17. Rudolfs Bems & Robert C. Johnson & Kei-Mu Yi, 2013. "The Great Trade Collapse," Annual Review of Economics, Annual Reviews, vol. 5(1), pages 375-400, May.
    18. Nitsch, Volker & Goldbach, Stefan, 2014. "Bank Credit and Trade: Evidence from Germany," Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100534, Verein für Socialpolitik / German Economic Association.
    19. C. Fritz Foley & Kalina Manova, 2015. "International Trade, Multinational Activity, and Corporate Finance," Annual Review of Economics, Annual Reviews, vol. 7(1), pages 119-146, August.
    20. Diez, Federico J. & Mora, Jesse & Spearot, Alan C., 2016. "Firms in international trade," Working Papers 16-25, Federal Reserve Bank of Boston.
    21. 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, January.

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