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Innocent bystanders: How foreign uncertainty shocks harm exporters

  • Daria Taglioni

    ()

    (The World Bank)

  • Veronika Zavacka

    (EBRD)

The failure of trade economists to anticipate the extreme drop in trade post-Lehman Brothers bankruptcy suggests that the behaviour of trade in exceptional circumstances may still be poorly understood. In this paper we explore whether uncertainty shocks have explanatory power for movements in trade. Our VAR estimations on US data suggest that domestic uncertainty is a strong predictor of movements in imports, but has little effect on exports. Guided by these results, we estimate a bilateral model with focus on the impact of importer uncertainty on foreign suppliers. We find that there is a strong negative relationship between uncertainty and trade and that this relationship is non-linear. Uncertainty matters most when its levels are exceptionally high. We find no evidence of learning from past turmoils, suggesting that prior experience with major uncertainty shocks does not reduce the effect on trade. In line with our expectations, the negative effect of uncertainty shocks on trade is higher for trade relationships more intensive in durable goods. Surprisingly, however, the effect of durability is non-linear. Supply chain considerations or the possibility that the relationships with the highest durability lead to important compositional effects may have a bearing on the results. Our results are robust to excluding the post-Lehman shock, suggesting that the trade response during the 2008-09 crisis has been similar to past uncertainty events.

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Paper provided by European Bank for Reconstruction and Development, Office of the Chief Economist in its series Working Papers with number 149.

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Length: 46 pages
Date of creation: Sep 2012
Date of revision:
Publication status: Published in Working papers 149, European Bank for Reconstruction and Development
Handle: RePEc:ebd:wpaper:149
Contact details of provider: Postal: One Exchange Square, London EC2A 2JN
Web page: http://www.ebrd.com/pages/research/publications/workingpapers.shtml

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