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

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      Author(s)
      Crozet, Matthieu
      Demir, Banu
      Javorcik, Beata
      Date
      2022-01-05
      Source Title
      IMF Economic Review
      Print ISSN
      20414161
      Publisher
      Palgrave Macmillan Ltd.
      Volume
      70
      Issue
      2
      Pages
      185 - 211
      Language
      English
      Type
      Article
      Item Usage Stats
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      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. © 2021, International Monetary Fund.
      Keywords
      International trade
      Trade finance
      Letter of credit
      Risk
      Global financial crisis
      Covid-19
      Permalink
      http://hdl.handle.net/11693/111682
      Published Version (Please cite this version)
      https://dx.doi.org/10.1057/s41308-021-00155-3
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      • Department of Economics 724
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