Measuring the effects of economic policy uncertainty on trade credit financing

ABSTRACT

This article provides an empirical investigation of the impacts of economic policy uncertainty on the methods of financing international transactions. Using regression, probit, and ordered logit model analyses, we find that an increase in the economic policy uncertainty index decreases the likelihood that a given import transaction will occur under trade financing. Thus, increased economic uncertainty raises the probability of using Cash in Advance, due to the importers’ desire for increased cash holding that results from the additional risk exposure.

KEYWORDS:

• Trade finance
• method of payments
• economic policy uncertainty index
• Cash in Advance

JEL CLASSIFICATION:

• F13
• F14

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ The same database was utilized in Turkcan and Avsar (2018), Demir and Javorcik (2018) and Avsar (2020).

² Following Antras and Foley (2015), we classified the open account and documentary collection as post-shipment terms.

³ A similar strategy was followed in Hoefele, Schmidt‐Eisenlohr, and Yu (2016).