Modeling the Costs of Trade Finance During the Financial Crisis of 2008-2009: An Application of Dynamic Hierarchical Linear Model

Abstract

The authors propose a dynamic hierarchical linear model (DHLM) to study the variations in the costs of trade finance across multiple countries during the global financial crisis of 2008-2009. Specifically, they examine how the impact of a set of four macroeconomic indicators on trade finance costs varied in and around the financial crisis. They find that countries with higher GDP growth faced lower costs of trade finance and countries with higher trade intensity (Trade/GDP) experienced higher trade finance costs in 2009 and 2010. Somewhat surprisingly, the countries with more stock market capitalization compared to GDP also faced higher costs of trade finance during and post crisis. Finally, inflation had a weak statistically significant impact on trade finance costs in 2009. The authors propose extensions to the model and discuss its alternative uses in different contexts.