The Effects of Oil Shocks in an Oil-Exporting Country Dependent on Letters of Credit: A DSGE Model

Document Type : Research Paper

Authors

1 Department of Economics, Faculty of Economics, Management and Accounting, Yazd University, Yazd, Iran.

2 Department of Economics, Faculty of Management and Economics, Tarbiat Modares University, Tehran, Iran.

3 Department of Business Economics, Faculty of Economics, Allameh Tabataba'i University, Tehran, Iran.

10.22059/jte.2026.345867.1008685

Abstract

The Global Financial Crisis of 2008 underlined the importance of understanding the details and mechanisms in place when two parties interact in financial markets. However, methods of international payment are largely absent from macroeconomic analysis. This paper attempts to model a small open oil-producing economy that relies on Letters of Credit (LCs) as its international payment method. The model, developed for Iran’s economy, includes producers that must import the intermediate goods they need using LCs. Simulation results from the model, estimated using the Bayesian method, show that an exogenous increase in LCs’ upfront payments leads to a recession. Moreover, the model’s dynamics following an adverse shock to oil prices or production depend on whether changes in LCs’ upfront payments are assumed to be exogenous or endogenous.

Keywords

Main Subjects

References

Ahn, J. (2020). A theory of domestic and international trade finance. In Emerging market finance: New challenges and opportunities (21, 203-229). Bingley: Emerald Publishing Limited.
Alessandria, G., Kaboski, J., & Midrigan, V. (2013). Trade wedges, inventories, and international business cycles. Journal of Monetary Economics, 60(1), 1-20. Retrieved from https://www.sciencedirect.com/science/article/pii/S0304393212001195 .
Amiti, M., & Weinstein, D. E. (2011). Exports and financial shocks. The Quarterly Journal of Economics, 126(4), 1841-1877. Retrieved from https://www.nber.org/system/files/working_papers/w15556/w15556.pdf .
Antras, P., & Foley, C. F. (2015). Poultry in motion: a study of international trade finance practices. Journal of Political Economy, 123(4), 853-901. Retrieved from https://www.nber.org/system/files/working_papers/w17091/w17091.pdf .
Behrens, K., Corcos, G., & Mion, G. (2013). Trade crisis? What trade crisis? Review of economics and statistics, 95(2), 702-709. Retrieved from https://www.econstor.eu/bitstream/10419/144407/1/wp195en.pdf .
Bems, R., Johnson, R. C., & Yi, K. M. (2010). Demand spillovers and the collapse of trade in the global recession. IMF Economic review, 58(2), 295-326. Retrieved from https://papers.ssrn.com/sol3/Delivery.cfm?abstractid=1627077 .
Bems, R., Johnson, R. C., & Yi, K. M. (2011). Vertical linkages and the collapse of global trade. American Economic Review, 101(3), 308-312. Retrieved from https://digitalcommons.dartmouth.edu/cgi/viewcontent.cgi?article=3399&context=facoa .
Bems, R., Johnson, R. C., & Yi, K. M. (2013). The great trade collapse. Annu. Rev. Econ., 5(1), 375-400. Retrieved from https://www.nber.org/system/files/working_papers/w18632/w18632.pdf .
Bown, C. P. (2011). Taking stock of antidumping, safeguards and countervailing duties, 1990–2009. The World Economy, 34(12), 1955-1998. Retrieved from https://onlinelibrary.wiley.com/doi/pdf/10.1111/j.1467-9701.2011.01388.x .
Bricongne, J. C., Fontagné, L., Gaulier, G., Taglioni, D., & Vicard, V. (2012). Firms and the global crisis: French exports in the turmoil. Journal of international Economics, 87(1), 134-146. Retrieved from https://www.econstor.eu/bitstream/10419/153679/1/ecbwp1245.pdf .
Brunnermeier, M. K., & Sannikov, Y. (2014). A macroeconomic model with a financial sector. American Economic Review, 104(2), 379-421. Retrieved from https://www.econstor.eu/bitstream/10419/144448/1/wp236en.pdf .
Bussière, M., Callegari, G., Ghironi, F., Sestieri, G., & Yamano, N. (2013). Estimating trade elasticities: demand composition and the trade collapse of 2008–2009. American economic Journal: macroeconomics, 5(3), 118-151. Retrieved from https://www.aeaweb.org/aej/mac/app/2011-0226_app.pdf .
Malouche, M. (2011). Trade finance during the great trade collapse. World Bank Publications. Retrieved from https://books.google.com/ .
Chor, D., & Manova, K. (2012). Off the cliff and back? Credit conditions and international trade during the global financial crisis. Journal of international economics, 87(1), 117-133. Retrieved from https://ink.library.smu.edu.sg/cgi/viewcontent.cgi?article=2164&context=soe_research .
Coulibaly, B., Sapriza, H., & Zlate, A. (2011). Trade credit and international trade during the 2008-09 global financial crisis. Washington, DC: Board of Governors of the Federal Reserve System. Retrieved from https://freit.org/WorkingPapers/Papers/FirmLevelTrade/FREIT195.pdf .
Demir, B., & Javorcik, B. (2020). Trade finance matters: evidence from the COVID-19 crisis. Oxford Review of Economic Policy, 36(Supplement_1), S397-S408. Retrieved from https://pmc.ncbi.nlm.nih.gov/articles/PMC7499719/pdf/graa034.pdf .
Dixit, A. K., & Stiglitz, J. E. (1977). Monopolistic competition and optimum product diversity. The American economic review, 67(3), 297-308. Retrieved from https://ageconsearch.umn.edu/record/268957/files/twerp_64.pdf.
Eaton, J., Kortum, S., Neiman, B., & Romalis, J. (2016). Trade and the global recession. American Economic Review, 106(11), 3401-3438. Retrieved from https://www.aeaweb.org/content/file?id=2505 .
Gawande, K., Hoekman, B., & Cui, Y. (2011). Determinants of trade policy responses to the 2008 financial crisis. World Bank Policy Research Working Paper, (5862). Retrieved from https://papers.ssrn.com/sol3/Delivery.cfm?abstractid=1952491 .
Kee, H. L., Neagu, C., & Nicita, A. (2013). Is protectionism on the rise? Assessing national trade policies during the crisis of 2008. Review of Economics and Statistics, 95(1), 342-346. Retrieved from https://papers.ssrn.com/sol3/Delivery.cfm?abstractid=1592805 .
Korinek, J., Le Cocguic, J., & Sourdin, P. (2010). The availability and cost of short-term trade finance and its impact on trade. Retrieved from https://ageconsearch.umn.edu/record/331989/files/5105.pdf .
Malouche, M. (2011). Trade finance during the great trade collapse. World Bank Publications. Retrieved from https://books.google.com/
Olsen, M. (2010). Banks in international trade: Incomplete international contract enforcement and reputation. Retrieved from https://www.academia.edu/download/31869786/role_of_banks.pdf .
Paravisini, D., Rappoport, V., Schnabl, P., & Wolfenzon, D. (2015). Dissecting the effect of credit supply on trade: Evidence from matched credit-export data. The review of economic studies, 82(1), 333-359. Retrieved from https://www.nber.org/system/files/working_papers/w16975/w16975.pdf .
Rotemberg, J. J. (1982). Sticky prices in the United States. Journal of political economy, 90(6), 1187-1211. Retrieved from https://dspace.mit.edu/bitstream/handle/1721.1/49091/stickypricesinun00rote.pdf?sequence=1&isAllowed=y .
Schmidt-Eisenlohr, T. (2013). Towards a theory of trade finance. Journal of International Economics, 91(1), 96-112. Retrieved from https://papers.ssrn.com/sol3/Delivery.cfm?abstractid=1987540.

Files

History

  • Receive Date: 17 July 2022
  • Revise Date: 15 February 2026
  • Accept Date: 17 April 2026

Share

How to cite

Statistics