Political Risk and Export Promotion: Evidence from Germany

48 Pages Posted: 14 Nov 2006

See all articles by Christoph Moser

Christoph Moser

Johannes Gutenberg University Mainz - Faculty of Law and Economics

Thorsten Nestmann

University of Mainz - Department of Economics

Michael Wedow

European Central Bank (ECB) - Directorate Financial Stability and Supervision

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Date Written: November 13, 2006

Abstract

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.

Keywords: public export credit guarantees, political risk, panel regression

JEL Classification: F13, H81, C23

Suggested Citation

Moser, Christoph and Nestmann, Thorsten and Wedow, Michael, Political Risk and Export Promotion: Evidence from Germany (November 13, 2006). Available at SSRN: https://ssrn.com/abstract=944779 or http://dx.doi.org/10.2139/ssrn.944779

Christoph Moser

Johannes Gutenberg University Mainz - Faculty of Law and Economics ( email )

Chair of Corporate Finance
D-55099 Mainz, 55128
Germany

Thorsten Nestmann

University of Mainz - Department of Economics ( email )

Chair of Corporate Finance
D-55099 Mainz, 55128
Germany

Michael Wedow (Contact Author)

European Central Bank (ECB) - Directorate Financial Stability and Supervision ( email )

Frankfurt a.M.
Germany

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