Trade credit, trade income elasticity and the international transmission of shocks

Anna Watson

doi:10.1007/s40822-021-00178-1

Abstract

The paper examines the impact of trade credit on cyclical fluctuations in international trade. It provides new empirical evidence based on firm-level UK and Irish data showing that exporters use trade credit more actively and intensively than non-exporters. The study introduces inter-firm lending into an open economy general equilibrium model with heterogeneous firms and endogenous entry into the exports market. It demonstrates that trade credit amplifies the impact of macroeconomic shocks on international trade both along the intensive and extensive margins and that it significantly contributes to the high trade income elasticity observed in the data.

Highlights

IntroductionOne of the prevalent features of international business cycle fluctuations which is difficult to reconcile with standard open economy macroeconomic models is the high volatility of imports and exports relative to output and strong procyclicality
One of the prevalent features of international business cycle fluctuations which is difficult to reconcile with standard open economy macroeconomic models is the high volatility of imports and exports relative to output and strong procyclicalityI am very grateful to Sean Holly, Giancarlo Corsetti, Philip Lane, Sergejs Saksonovs, Paul Youdell, Oliver de Groot as well as the participants of the 2018 Royal Economic Society Annual Conference, the 2018 European Trade Study Group Annual Conference, the EEA-ESEM 2019 and the 32nd EBES Conference for their helpful comments and suggestions
This paper investigates whether and to what extent trade credit representing inter-firm lending contributes to the high volatility of international trade flows and the procyclicality of trade openness, measured by the trade to output ratio

Summary

Introduction

One of the prevalent features of international business cycle fluctuations which is difficult to reconcile with standard open economy macroeconomic models is the high volatility of imports and exports relative to output and strong procyclicality. I am very grateful to Sean Holly, Giancarlo Corsetti, Philip Lane, Sergejs Saksonovs, Paul Youdell, Oliver de Groot as well as the participants of the 2018 Royal Economic Society Annual Conference, the 2018 European Trade Study Group Annual Conference, the EEA-ESEM 2019 and the 32nd EBES Conference for their helpful comments and suggestions. A canonical international business cycle model implies trade income elasticity equal to one. This paper investigates whether and to what extent trade credit representing inter-firm lending contributes to the high volatility of international trade flows and the procyclicality of trade openness, measured by the trade to output ratio

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