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Political risk and export promotion: evidence from Germany

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Author Info
Moser, Christoph
Nestmann, Thorsten
Wedow, Michael

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Abstract

Political risk represents an important hidden transaction cost that reduces international trade. This paper investigates the claim that German public export credit guarantees (Hermes guarantees) mitigate this friction to trade flows and hence promote exports. We employ an empirical trade gravity model, where we explicitly control for political risk in the importing country in order to evaluate the effect of export guarantees. The idea behind export promotion through public export credit agencies (ECAs) is that the private market is unable to provide adequate insurance for all risks associated with exports. As a consequence, firms' export activities are limited in the absence of insurance provision. Using a novel data set on guarantees we estimate the effect of guarantees in a static and dynamic panel model. We find a statistically and economically significant positive effect of public export guarantees on exports which indicates that export promotion is indeed effective. Furthermore, political risk turns out to be a robust determinant of exports and hence should be taken into account in any empirical model of trade.

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Paper provided by Deutsche Bundesbank, Research Centre in its series Discussion Paper Series 1: Economic Studies with number 2006,36.

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Date of creation: 2006
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Handle: RePEc:zbw:bubdp1:5110

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Related research
Keywords: public export credit guarantees political risk panel regression

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Find related papers by JEL classification:
C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data
F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
H81 - Public Economics - - Miscellaneous Issues - - - Governmental Loans and Credits

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  2. Alsem, K.J., 2003. "Insurability of export credit risks," Research Report 03F07, University of Groningen, Research Institute SOM (Systems, Organisations and Management). [Downloadable!]
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  15. Andrew K. Rose, 2005. "The Foreign Service and Foreign Trade: Embassies as Export Promotion," NBER Working Papers 11111, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  16. Bergstrand, Jeffrey H, 1985. "The Gravity Equation in International Trade: Some Microeconomic Foundations and Empirical Evidence," The Review of Economics and Statistics, MIT Press, vol. 67(3), pages 474-81, August. [Downloadable!] (restricted)
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  18. Andrew B. Bernard & J. Bradford Jensen, 2004. "Why Some Firms Export," The Review of Economics and Statistics, MIT Press, vol. 86(2), pages 561-569, 04. [Downloadable!] (restricted)
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