Authors: Friederike Niepmann and Tim Schmidt-Eisenlohr
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Authors: Friederike Niepmann and Tim Schmidt-Eisenlohr
This study provides evidence that shocks to the supply of trade finance have a causal effect on U.S. exports. The identification strategy exploits variation in the importance of banks as providers of letters of credit across countries. The larger a U.S. bank’s share of the trade finance market in a country, the larger should be the effect on exports to that country if the bank changes its supply of letters of credit. We find that a shock of one standard deviation to a country’s supply of letters of credit increases export growth, on average, by 1.5 percentage points. The effect is larger for exports to small and poor destinations and more than doubles during times of financial distress. The results imply that banks affect firms’ export behavior and suggest that trade finance played a role in the Great Trade Collapse.