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Board of Governors of the Federal Reserve System (U.S.)
International Finance Discussion Papers
No Guarantees, No Trade: How Banks Affect Export Patterns
Friederike Niepmann
Tim Schmidt-Eisenlohr
Abstract

How relevant are financial instruments to manage risk in international trade for exporting? Employing a unique dataset of U.S. banks' trade finance claims by country, this paper estimates the effect of shocks to the supply of letters of credit on U.S. exports. We show that a one-standard deviation negative shock to a country's supply of letters of credit reduces U.S. exports to that country by 1.5 percentage points. This effect is stronger for smaller and poorer destinations. It more than doubles during crisis times, suggesting a non-negligible role for finance in explaining the Great Trade Collapse.


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Friederike Niepmann & Tim Schmidt-Eisenlohr, No Guarantees, No Trade: How Banks Affect Export Patterns, Board of Governors of the Federal Reserve System (U.S.), International Finance Discussion Papers 1158, 10 Feb 2016.
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Keywords: trade finance; global banks; letter of credit; exports; financial shocks
DOI: 10.17016/IFDP.2016.1158
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