The Role of Intermediaries in Facilitating Trade

We provide systematic evidence that intermediaries play an important role in facilitating trade using a firm-level the census of China's exports. Intermediaries account for around 20% of China's exports in 2005. This implies that many firms engage in trade without directly exporting products. We modify a heterogeneous firm model so that firms endogenously select their mode of export - either directly or indirectly through an intermediary. The model predicts that intermediaries will be relatively more important in markets that are more difficult to penetrate. We provide empirical confirmation for this prediction, and generate new facts regarding the activity of intermediaries.

A Theory of Domestic and International Trade Finance

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.Banks;Economic models;Payment systems;screening, credit, payment system, counterparty, counterpart, prices, collateral, third parties

For Whom the Levy Tolls: The Case of a Macroprudential Stability Levy in South Korea

Can capital flow management measures (CFMs) reduce external vulnerability of the economy? This paper studies the effectiveness of a macroprudential stability levy introduced in Korea, which was intended to curb foreign currency (FX) debt as well as to lengthen its maturity structure in the banking sector. Using the detailed bank-level balance sheet data, this study finds that the levy had limited effects on curbing non-core FX debt, while it substantially lengthened its maturity structure driven mainly by foreign bank branches' interoffice account. The subsequent analysis employing the transaction-level loan rate data further suggests that it likely had unintended consequences favoring foreign bank branches that took advantage of regulatory arbitrage and therefore were able to take FX loan market share from domestic banks that could not avoid passing the levy onto their borrowers.N

Capacity Constrained Exporters: Micro Evidence and Macro Implications ∗

This study challenges a central assumption of standard trade models: constant marginal cost technology. We present evidence consistent with the view that increasing marginal cost is present in the data, and further identify financial and physical capacity constraints as the main sources of increasing marginal cost. To understand and quantify the importance of increasing marginal cost faced by financially and physically constrained exporters, we develop a novel structural estimation framework that incorporates these micro frictions. Our structural estimates suggest that the presence of such capacity constrained firms can (1) reduce aggregate output responses to external demand shocks by 30 % and (2) result in welfare loss by around 23%.

Trade finance and the great trade collapse

Economic models that do not incorporate financial frictions only explain about 70 to 80 percent of the decline in world trade that occurred in the 2008-2009 crisis. We review some of the evidence that shows financial factors also contributed to the great trade collapse, and we uncover two new stylized facts in support of it. First, we show that the prices of manufactured exports rose relative to domestic prices during the crisis. Second, we show that U.S. seaborne exports and imports, which are likely to be more sensitive to trade finance problems, saw their prices rise relative to goods shipped by air or land. For nearly half a century (c.f. Houthakker and Magee (1969)), economists knew that trade flows were two to three times more volatile than GDP despite the fact that standard theories predicted an elasticity of one. A major puzzle developed in the fourth quarter of 2008 as standard econometric models, which already incorporated these very high elasticities, could only predict 70 to 80 percent of the decline in world trade (see, for example, the OECD estimates in OECD (2009)). Over the next two years, economists have tried, with little success, to improve on this “seventy percent solution”. Much progress has been made in building theoretical models t