Discussion Paper Details

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Title: International trade and letters of credit: A double-edged sword in times of crises

Author(s): Matthieu Crozet, Banu Demir and Beata Javorcik

Publication Date: October 2021

Keyword(s): COVID-19, Global Financial Crisis, international trade, letter of credit, risk and Trade Finance

Programme Area(s): International Macroeconomics and Finance and International Trade and Regional Economics

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.

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Bibliographic Reference

Crozet, M, Demir, B and Javorcik, B. 2021. 'International trade and letters of credit: A double-edged sword in times of crises'. London, Centre for Economic Policy Research.