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Trade and Uncertainty

Author

Listed:
  • Dennis Novy

    (University of Warwick and CEPR)

  • Alan M. Taylor

    (University of California, Davis; NBER and CEPR)

Abstract

We offer a new explanation as to why international trade is so volatile in response to economic shocks. Our approach combines the idea of uncertainty shocks with international trade. Firms order inputs from home and foreign suppliers. In response to an uncertainty shock firms disproportionately cut orders of foreign inputs due to higher fixed costs. In the aggregate, this leads to a bigger contraction in international trade flows than in domestic activity, a magnification effect. We confront the model with newly compiled US import and industrial production data. Our results help to explain the Great Trade Collapse of 2008–2009.

Suggested Citation

  • Dennis Novy & Alan M. Taylor, 2020. "Trade and Uncertainty," The Review of Economics and Statistics, MIT Press, vol. 102(4), pages 749-765, October.
  • Handle: RePEc:tpr:restat:v:102:y:2020:i:4:p:749-765
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    More about this item

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General

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