Trade and Uncertainty

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 behavior of international trade.

Global and Country‐Specific Output Growth Uncertainty and Macroeconomic Performance

“…Handley () and Handley and Limão () show that with sunk costs of entry, trade policy uncertainty raises the real‐options value of waiting to enter export markets. Novy and Taylor () provide an explanation for the global trade collapse of 2008–09 by considering a model in which fixed costs of ordering lets firms hold an inventory of imported intermediates. In their framework, uncertainty shocks induce firms to cut their orders of foreign intermediates disproportionately strongly, thereby inducing bigger contractions in international trade flows compared to domestic economic activity.…”

On tariff changes and firm-production evolution: insights from Turkish manufacturing

“…On the one hand, higher specialisation could engender higher productivity and a superior overall firm performance. On the other hand, a reduced extent of diversification could enhance firms' growth volatility through an increased exposure to external asymmetric demand shocks (Blattman, Hwang, and Williamson 2007;Novy and Taylor 2014). Nonetheless, as firms tend to specialise in high complexity goods, and empirical evidence shows that higher complexity at country level is related to lower volatility (Krishna and …”

Making Do with What You Have: Conflict, Firm Performance and Input Misallocation in Palestine

“…Several theoretical papers have emphasized the importance of trade in intermediate inputs in generating productivity gains resulting from better access to superior inputs and technology (Ethier 1982;Melitz 2003;Kugler andVerhoogen 2008, 2009;Kasahara and Lapham 2013;Novy and Taylor 2014). These predictions are confirmed by robust empirical evidence.…”