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Political risk and export promotion: Evidence from Germany

  • Nestmann, Thorsten
  • Moser, Christoph
  • Wedow, Michael

Political risk represents an important hidden transaction cost that reduces international trade. This paper investigates the claim that German public export credit guarantees (Hermes 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. The idea behind export promotion through public export credit agencies (ECAs) is that the private market is unable to provide adequate insurance for all risks associated with exports. As a consequence, firms' export activities are limited in the absence of insurance provision. 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 a robust determinant of exports and hence should be taken into account in any empirical model of trade.

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Paper provided by Deutsche Bank Research in its series Research Notes with number 23.

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Date of creation: 2006
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Handle: RePEc:zbw:dbrrns:23
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  1. Andrew K. Rose, 2004. "Do We Really Know That the WTO Increases Trade?," American Economic Review, American Economic Association, vol. 94(1), pages 98-114, March.
  2. Dixit, A., 1988. "Entry And Exit Decisions Under Uncertainty," Papers 91, Princeton, Department of Economics - Financial Research Center.
  3. Richard Blundell & Steve Bond, 1995. "Initial conditions and moment restrictions in dynamic panel data models," IFS Working Papers W95/17, Institute for Fiscal Studies.
  4. Andrew B. Bernard & J. Bradford Jensen, 2001. "Why Some Firms Export," NBER Working Papers 8349, National Bureau of Economic Research, Inc.
  5. Andrew Bernard & Joachim Wagner, 2001. "Export entry and exit by German firms," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 137(1), pages 105-123, March.
  6. Pierre-Guillaume Méon & Khalid Sekkat, 2004. "Does the Quality of Institutions Limit the MENA's Integration in the World Economy?," The World Economy, Wiley Blackwell, vol. 27(9), pages 1475-1498, 09.
  7. R Portes & H Rey, 2000. "The Determinants Of Cross-Border Equity Flows," CEP Discussion Papers dp0446, Centre for Economic Performance, LSE.
  8. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, June.
  9. Rose, Andrew K, 2005. "The Foreign Service and Foreign Trade: Embassies as Export Promotion," CEPR Discussion Papers 4953, C.E.P.R. Discussion Papers.
  10. Elhanan Helpman, 1998. "The Structure of Foreign Trade," Harvard Institute of Economic Research Working Papers 1848, Harvard - Institute of Economic Research.
  11. Funatsu, Hideki, 1986. "Export Credit Insurance and Moral Hazard," 商学討究 (Shogaku Tokyu), Otaru University of Commerce, vol. 36(3), pages 217-235.
  12. Rienstra-Munnicha, Paul & Turvey, Calum G., 2002. "The Relationship Between Exports, Credit Risk And Credit Guarantees," Working Papers 34115, University of Guelph, Department of Food, Agricultural and Resource Economics.
  13. Filip Abraham & Gerda Dewit, 2000. "Export Promotion Via Official Export Insurance," Open Economies Review, Springer, vol. 11(1), pages 5-26, January.
  14. repec:dgr:rugsom:03f07 is not listed on IDEAS
  15. Dewit, Gerda, 2001. "Intervention in risky export markets: insurance, strategic action or aid?," European Journal of Political Economy, Elsevier, vol. 17(3), pages 575-592, September.
  16. Rienstra-Munnicha, Paul & Turvey, Calum G., 2002. "The Relationship Between Exports, Credit Risk And Credit Guarantees," 2002 Annual meeting, July 28-31, Long Beach, CA 19583, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  17. Salvador Gil & Rafael Llorca & José A. Martínez Serrano, 2008. "Measuring the impact of regional export promotion: The Spanish case," Papers in Regional Science, Wiley Blackwell, vol. 87(1), pages 139-146, 03.
  18. Bergstrand, Jeffrey H, 1985. "The Gravity Equation in International Trade: Some Microeconomic Foundations and Empirical Evidence," The Review of Economics and Statistics, MIT Press, vol. 67(3), pages 474-81, August.
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