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Exports, investment and policy uncertainty

Author

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  • Andrew Greenland
  • Mihai Ion
  • John Lopresti

Abstract

Building on a literature that underscores the value of delaying investment in the face of uncertainty, we study how policy uncertainty in 18 large economies affects exports to these economies. We decompose aggregate bilateral trade flows from 1995 to 2013 into intensive and extensive margin components and employ a gravity specification to assess the impact of policy uncertainty on each margin separately. Consistent with theory, increases in policy uncertainty decrease both trade values and the extensive margin but, if anything, increase the intensive margin. In further tests, we use various proxies for sunk export costs and demonstrate that the effects of policy uncertainty are more pronounced where sunk costs are higher.

Suggested Citation

  • Andrew Greenland & Mihai Ion & John Lopresti, 2019. "Exports, investment and policy uncertainty," Canadian Journal of Economics, Canadian Economics Association, vol. 52(3), pages 1248-1288, August.
    • Handle: RePEc:cje:issued:v:52:y:2019:i:3:p:1248-1288
    DOI: 10.1111/caje.12400
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    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation

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