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Can Global Uncertainty Promote International Trade?

Author

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  • Veldkamp, Laura
  • Baley, Isaac
  • Waugh, Michael
Abstract
Common wisdom holds that uncertainty impedes trade|yet 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 variance in returns to exporting. This implies 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 in which consumption is most valuable. Trade creates value, in part, by offering a mechanism for risk sharing, and risk sharing is most effective when both parties are uninformed.

Suggested Citation

  • Veldkamp, Laura & Baley, Isaac & Waugh, Michael, 2019. "Can Global Uncertainty Promote International Trade?," CEPR Discussion Papers 14255, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:14255
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    Cited by:

    1. Isaac Baley & Laura Veldkamp, 2021. "Bayesian learning," Economics Working Papers 1797, Department of Economics and Business, Universitat Pompeu Fabra.
    2. Efrem Castelnuovo, 2022. "Uncertainty Before and During COVID-19: A Survey," "Marco Fanno" Working Papers 0279, Dipartimento di Scienze Economiche "Marco Fanno".
    3. Benhima, Kenza & Bolliger, Elio, 2022. "Do Local Forecasters Have Better Information?," MPRA Paper 117072, University Library of Munich, Germany, revised Sep 2023.
    4. Appelbaum, Elie, 2021. "Implicit Trade in Risk and Risk Aversion," MPRA Paper 113000, University Library of Munich, Germany.

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    More about this item

    Keywords

    Trade; Uncertainty;

    JEL classification:

    • D5 - Microeconomics - - General Equilibrium and Disequilibrium
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • D9 - Microeconomics - - Micro-Based Behavioral Economics
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • F6 - International Economics - - Economic Impacts of Globalization

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