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

71 Pages Posted: 20 Jun 2018

See all articles by Jeronimo Carballo

Jeronimo Carballo

University of Colorado at Boulder

Kyle Handley

University of Michigan, Stephen M. Ross School of Business

Nuno Limão

University of Maryland - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: June 2018

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.

Keywords: uncertainty, trade agreements, international trade

JEL Classification: E02, E3, E61, F02, F1, F14, F15, F55, F6

Suggested Citation

Carballo, Jeronimo and Handley, Kyle and Limão, Nuno, Economic and Policy Uncertainty: Export Dynamics and the Value of Agreements (June 2018). Ross School of Business Paper No. 1382. Available at SSRN: https://ssrn.com/abstract=3199943 or http://dx.doi.org/10.2139/ssrn.3199943

Jeronimo Carballo (Contact Author)

University of Colorado at Boulder ( email )

1070 Edinboro Drive
Boulder, CO 80309
United States

Kyle Handley

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

Nuno Limão

University of Maryland - Department of Economics ( email )

College Park, MD 20742
United States
301-405-7842 (Phone)
301-405 3542 (Fax)

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