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Economic and Policy Uncertainty: Export Dynamics and the Value of Agreements

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  • Jeronimo Carballo
  • Kyle Handley
  • Nuno Limão

Abstract

We examine the interaction of economic and policy uncertainty in a dynamic, heterogeneous firms model. Uncertainty about foreign income, trade protection and their interaction dampens export investment. This can be mitigated by trade agreements, which are particularly valuable in periods of increased demand volatility. We use firm data to establish new facts about U.S. export dynamics in 2003-2011 and estimate the model. We find a significant role for uncertainty in explaining the trade collapse in the 2008 crisis and partial recovery in its aftermath. Consistent with the model predictions, we find that the negative effects worked (1) through the extensive margin, (2) in destinations without preferential agreements with the U.S. (accounting for over half its trade) and (3) in industries with higher potential protection. U.S. exports to non-preferential markets would have been 6.5% higher under an agreement—equivalent to an 8% foreign GDP increase. These findings highlight and quantify the value of international policy commitments through agreements that mitigate uncertainty, particularly during downturns.

Suggested Citation

  • Jeronimo Carballo & Kyle Handley & Nuno Limão, 2018. "Economic and Policy Uncertainty: Export Dynamics and the Value of Agreements," NBER Working Papers 24368, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:24368
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    Cited by:

    1. Bloom, Nicholas & Bunn, Philip & Chen, Scarlet & Mizen, Paul & Smietanka, Pawel & Thwaites, Gregory, 2019. "The impact of Brexit on UK firms," Bank of England working papers 818, Bank of England.
    2. Di Ubaldo, Mattia & Borchert, Ingo, 2020. "Go ahead and trade: The effect of uncertainty removal in the EU’s GSP scheme," Papers WP691, Economic and Social Research Institute (ESRI).
    3. INADA Mitsuo & JINJI Naoto, 2020. "To What Degree does Policy Uncertainty Affect Foreign Direct Investment? Micro-evidence from Japan's International Investment Agreements," Discussion papers 20022, Research Institute of Economy, Trade and Industry (RIETI).
    4. Douch, Mustapha & Edwards, T.Huw & Soegaard, Christian, 2018. "The Trade Effects of the Brexit Announcement Shock," The Warwick Economics Research Paper Series (TWERPS) 1176, University of Warwick, Department of Economics.
    5. Eichengreen, Barry, 2020. "Why hasn’t the impact of the trade war been greater?," Journal of Policy Modeling, Elsevier, vol. 42(4), pages 820-828.
    6. Ngozi E. Egbuna (PhD) & Maimuna John-Sowe & Dauda Mohammed (PhD) & Hissan Abubakari & Eric L. Sambolah & Kormay Adams, 2020. "Uncertainty And Economic Performance In The West African Monetary Zone (Wamz): A Fixed Effect Panel Threshold Approach," Working Papers 19, West African Monetary Institute.
    7. Yuee Li & Jingdong Li, 2021. "How Does China’s Economic Policy Uncertainty Affect the Sustainability of Its Net Grain Imports?," Sustainability, MDPI, Open Access Journal, vol. 13(12), pages 1-21, June.
    8. Fernandes, Ana P. & Winters, L. Alan, 2021. "Exporters and shocks: The impact of the Brexit vote shock on bilateral exports to the UK," Journal of International Economics, Elsevier, vol. 131(C).
    9. Sravaitri CHAUDHURI, 2020. "Welfare enhancing uncertainty," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 0(4(625), W), pages 73-88, Winter.

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    More about this item

    JEL classification:

    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • F02 - International Economics - - General - - - International Economic Order and Integration
    • F1 - International Economics - - Trade
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F15 - International Economics - - Trade - - - Economic Integration
    • F55 - International Economics - - International Relations, National Security, and International Political Economy - - - International Institutional Arrangements
    • F6 - International Economics - - Economic Impacts of Globalization

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