Trade and uncertainty

Novy, Dennis and Taylor, Alan M. (2014) Trade and uncertainty. CEP Discussion Papers (CEPDP1266). London School of Economics and Political Science. Centre for Economic Performance, London, UK.

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Abstract

We offer a new explanation as to why international trade is so volatile in response to economic shocks. Our approach combines the uncertainty shock idea of Bloom (2009) with a model of international trade, extending the idea to the open economy. Firms import intermediate inputs from home or foreign suppliers, but with higher costs in the latter case. Due to fixed costs of ordering firms hold an inventory of intermediates. We show that in response to an uncertainty shock firms optimally adjust their inventory policy by cutting their orders of foreign intermediates disproportionately strongly. In the aggregate, this response leads to a bigger contraction in international trade flows than in domestic economic activity. We confront the model with newly-compiled monthly aggregate U.S. import data and industrial production data going back to 1962, and also with disaggregated data back to 1989. Our results suggest a tight link between uncertainty and the cyclical behaviour of international trade.

Item Type:	Monograph (Discussion Paper)
Official URL:	http://cep.lse.ac.uk/_new/publications/series.asp?...
Additional Information:	© 2014 The Authors
Divisions:	Centre for Economic Performance
Subjects:	H Social Sciences > HC Economic History and Conditions H Social Sciences > HF Commerce J Political Science > JZ International relations
JEL classification:	E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles F - International Economics > F1 - Trade
Date Deposited:	26 Nov 2014 16:03
Last Modified:	10 Nov 2024 20:36
Funders:	Economic and Social Research Council
URI:	http://eprints.lse.ac.uk/id/eprint/60280

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