A Theory of Domestic and International Trade Finance

November 1, 2011

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Format: Chicago

JaeBin Ahn. A Theory of Domestic and International Trade Finance, (USA: International Monetary Fund, 2011) accessed December 3, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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.

Subject: Banking, Credit, Debt default, Economic sectors, External debt, Financial institutions, Foreign corporations, International trade, Loans, Money, Trade finance

Keywords: Bank intermediation, Borrowing cost, Buyer's bank, Credit, Debt default, Foreign corporations, Global, Great trade collapse, International transaction, Letter of credit, Letter of credit credit system, Loans, Optimization problem, Payment system, Screening, Screening tests, Supplier's bank, Trade finance, WP

Publication Details

Pages:

35
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2011/262
Stock No:

WPIEA2011262
ISBN:

9781463924607
ISSN:

1018-5941

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