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

30 Pages Posted: 15 Jul 2021

See all articles by Matthieu Crozet

Matthieu Crozet

University of Paris-Saclay

Banu Demir

Bilkent University

Beata S. Javorcik

University of Oxford - Department of Economics

Date Written: July 12, 2021

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.

Keywords: International trade, Trade finance, Letter of credit, Risk, Global Financial Crisis, Covid-19

JEL Classification: G01, F14, F23

Suggested Citation

Crozet, Matthieu and Demir, Banu and Javorcik, Beata S., International Trade and Letters of Credit: A Double-edged Sword in Times of Crises (July 12, 2021). EBRD Working Paper No. 258, Available at SSRN: https://ssrn.com/abstract=3884842 or http://dx.doi.org/10.2139/ssrn.3884842

Matthieu Crozet (Contact Author)

University of Paris-Saclay ( email )

France

Banu Demir

Bilkent University ( email )

Beata S. Javorcik

University of Oxford - Department of Economics

10 Manor Rd
Oxford, OX1 3UQ
United Kingdom

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