Exports, Investment and Policy Uncertainty

Abstract

Building on a literature that underscores the value of delaying investment in the face of uncertainty, we study how policy uncertainty in fifteen large economies affects trade flows into these countries. We show that high levels of uncertainty in destination markets are associated with significantly lower exports to those markets. Furthermore, consistent with a model in which firms face irreversible costs to export, we show that this effect is entirely driven by a reduction in the entry of new products. Finally, we find that the effect of uncertainty on trade flows is significantly stronger when trade costs are less reversible.

Keywords: Policy Uncertainty, International Trade, Extensive Margin, Intensive Margin, Investment Irreversibility

JEL Classification: D81, G18, F14