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Political Risk and Export Promotion: Evidence from Germany

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  • Christoph Moser
  • Thorsten Nestmann
  • Michael Wedow

Abstract

Political risk represents an important hidden transaction cost that reduces international trade. This paper investigates the claim that public export credit 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. 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 an important obstacle for exports and hence should be taken into account in any empirical model of trade.

Suggested Citation

  • Christoph Moser & Thorsten Nestmann & Michael Wedow, 2008. "Political Risk and Export Promotion: Evidence from Germany," The World Economy, Wiley Blackwell, vol. 31(6), pages 781-803, June.
    • Handle: RePEc:bla:worlde:v:31:y:2008:i:6:p:781-803
    DOI: 10.1111/j.1467-9701.2008.01102.x
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    More about this item

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • H81 - Public Economics - - Miscellaneous Issues - - - Governmental Loans; Loan Guarantees; Credits; Grants; Bailouts
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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