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A theory of domestic and international trade finance

Author: JaeBin Ahn; International Monetary Fund. Research Department,
Publisher: [Washington, D.C.] : International Monetary Fund, ©2011.
Series: IMF working paper, WP/11/262.
Edition/Format:   eBook : Document : International government publication : EnglishView all editions and formats
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  Read more...
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Genre/Form: Electronic books
Additional Physical Format: Print version:
Ahn, JaeBin.
A Theory of Domestic and International Trade Finance.
Washington : International Monetary Fund, ©2011
Material Type: Document, Government publication, International government publication, Internet resource
Document Type: Internet Resource, Computer File
All Authors / Contributors: JaeBin Ahn; International Monetary Fund. Research Department,
ISBN: 1283554437 9781283554435 9781463927165 1463927169
OCLC Number: 763183164
Notes: At head of title: Research Department.
Title from PDF title page (IMF Web site, viewed November 23, 2011).
"November 2011."
Description: 1 online resource (36 pages).
Contents: Cover Page; Title Page; Copyright Page; Contents; I. Introduction; II. Baseline Model; A. Banks with Costly Screening; 1. Screening Tests for Transactions Under Open Account System; 2. Property of Screening Tests; III. Trade Finance Premium; A. Optimal Investment in Screening Tests; 3. Optimal Investment in Screening Tests; B. Counter-Cyclical Trade Finance Premium; IV. Extension: A Letter of Credit (L/C); A.A Letter of Credit (L/C); B. Optimal Payment System; 4. L/C vs OA: Simplified Illustration; C. Banking Crisis and A Letter of Credit. 5. Cyclicality of the Relative Export Sales (L/C) to Domestic Sales (OA)V. Conclusion; References; Footnotes.
Series Title: IMF working paper, WP/11/262.
Responsibility: 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.

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