2014
DOI: 10.3386/w19941
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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 p… Show more

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Cited by 57 publications
(49 citation statements)
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“…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.…”
Section: Introductionmentioning
confidence: 99%
“…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.…”
Section: Introductionmentioning
confidence: 99%
“…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 …”
Section: Resultsmentioning
confidence: 99%
“…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.…”
Section: Introductionmentioning
confidence: 84%