Might Global Uncertainty Promote International Trade?

48 Pages Posted: 4 Mar 2019 Last revised: 20 Jun 2021

See all articles by Isaac Baley

Isaac Baley

Universitat Pompeu Fabra; Barcelona GSE; Centre for Economic Policy Research (CEPR)

Laura Veldkamp

Columbia University - Columbia Business School; National Bureau of Economic Research (NBER)

Michael E. Waugh

New York University (NYU), Leonard N. Stern School of Business, Department of Economics

Date Written: February 2019

Abstract

Common wisdom dictates that uncertainty impedes trade—we show that uncertainty can fuel more trade in a simple general equilibrium trade model with information frictions. In equilibrium, increases in uncertainty increase both the mean and the variance in returns to exporting implying that trade can increase or decrease with uncertainty depending on preferences. Under general conditions on preferences, we characterize the importance of these forces using a sufficient statistics approach. Higher uncertainty leads to increases in trade because agents receive improved terms of trade, particularly in states of nature where consumption is most valuable. Trade creates value, in part, by offering a mechanism to share risk and risk sharing is most effective when both parties are uninformed.

Suggested Citation

Baley, Isaac and Veldkamp, Laura and Waugh, Michael E., Might Global Uncertainty Promote International Trade? (February 2019). NBER Working Paper No. w25606, Available at SSRN: https://ssrn.com/abstract=3346225

Isaac Baley (Contact Author)

Universitat Pompeu Fabra ( email )

Barcelona
Spain

Barcelona GSE ( email )

Ramon Trias Fargas, 25-27
Barcelona, Barcelona 08005
Spain

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Laura Veldkamp

Columbia University - Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Michael E. Waugh

New York University (NYU), Leonard N. Stern School of Business, Department of Economics ( email )

269 Mercer Street
New York, NY 10003
United States

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