Working Paper: NBER ID: w25606
Authors: Isaac Baley; Laura Veldkamp; Michael E. Waugh
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.
Keywords: global uncertainty; international trade; risk sharing; information frictions
JEL Codes: A0; E1; E7; F1; F4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| global uncertainty (F69) | trade (F19) |
| global uncertainty (F69) | mean and variance of terms of trade (F11) |
| mean and variance of terms of trade (F11) | export volumes (F10) |
| uncertainty (D89) | risk-sharing mechanism (D47) |
| uncertainty (D89) | preferences influence on trade (F10) |
| high uncertainty (D89) | more trade in low endowment states (F14) |