A Theory of Domestic and International Trade Finance

36 Pages Posted: 20 Dec 2011

See all articles by JaeBin Ahn

JaeBin Ahn

International Monetary Fund (IMF)

Date Written: November 2011


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.

Keywords: Banks, Credit, Economic models, Payment systems, Trade

Suggested Citation

Ahn, JaeBin, A Theory of Domestic and International Trade Finance (November 2011). IMF Working Papers, Vol. , pp. 1-35, 2011. Available at SSRN: https://ssrn.com/abstract=1974830

JaeBin Ahn (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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