Effect of Foreign Trade Credit Insurance on Foreign Trade

Based upon the gravity model and data period of 1992~2013, this empirical research analyses the impact of Foreign trade Credit insurance as a determinant of bilateral trade volume between the Republic of Korea and its top ten trading partners. In order to overcome a potential endogeneity issue between trade volume and the insurance, we employ the dynamic panel analysis technique in addition to a time series-cross sectional pooling model, fixed effect model, and random effect model. Focusing on the effect of the insurance variable, we control the other important variables to influence the trade volume including gross domestic production and geographical distance. As expected, the insurance is found to be an important variable to determine the volume of bilateral trade flow in most models while the distance is a negative determinant of trade volume, as the gravity model implies. The empirical results, showing an increase of trade volume following an additional one unit of the insurance, implies that Korean trade would grow faster if shifting to large and close economies, as the gravity model tells, while the insurance can play a pivotal role to support those transactions.