Can Global Uncertainty Promote International Trade?

Laura Veldkamp, Isaac Baley and Michael Waugh

No 14255, CEPR Discussion Papers from Centre for Economic Policy Research

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.

Keywords: Trade; Uncertainty (search for similar items in EconPapers)
Date: 2019-12
New Economics Papers: this item is included in nep-int
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Related works:
Journal Article: Can global uncertainty promote international trade? (2020)
Working Paper: Can Global Uncertainty Promote International Trade? (2016)
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