Abstract
Since the introduction of the news-based policy uncertainty measure, a few studies have looked at its impact on trade flows by using panel models and aggregate trade data. In this paper we consider the short-run and long-run response of 61 2-digit U.S. exporting industries to Korea and 49 2-digit Korean exporting industries to the U.S. to policy uncertainty measures of the U.S. and Korea. We find that both measures have short-run effects on exports of almost one-third of industries in either direction. In the long run, however, while nine U.S. exporting industries (with a trade share of 9%) are negatively affected by the Korean uncertainty measure, only five industries (with 6% export share) are affected by the U.S. uncertainty measure. As for the Korean exporting industries, we find that three industries with a 31% export share are affected positively by the Korean uncertainty measure and six industries with a 7% export share are affected positively by the U.S. uncertainty measure.
Highlights
When the international monetary system shifted from fixed to relatively more flexible exchange rates in March 1973, a new area in international economics began emerging where researchers became interested in the impact of exchange rate uncertainty or volatility on trade flows among countries. Bahmani-Oskooee and Hegerty (2007) is the latest review article on the topic
A maximum of eight lags are imposed on each first-differenced variable and Akaike’s information criterion (AIC) is used to select an optimum specification in each case
Depending on the availability of the data, we include 61 2-digit U.S exporting industries to Korea and 49 2-digit Korean exporting industries to the U.S Monthly data over the period 2000M1—2020M7 are used to carry out the empirical analysis
Summary
When the international monetary system shifted from fixed to relatively more flexible exchange rates in March 1973, a new area in international economics began emerging where researchers became interested in the impact of exchange rate uncertainty or volatility on trade flows among countries. Bahmani-Oskooee and Hegerty (2007) is the latest review article on the topic. When the international monetary system shifted from fixed to relatively more flexible exchange rates in March 1973, a new area in international economics began emerging where researchers became interested in the impact of exchange rate uncertainty or volatility on trade flows among countries. Exchange rate uncertainty is not the only factor that may hurt trade flows. Exchange rate uncertainty or volatility could coincide with other uncertain factors that could hurt trade flows at the same time. One such measure is nothing but economic policy uncertainty, which is news-based. In every country for which the measure is constructed, they search highly circulated news associated with policy uncertainty issues. “central bank”, “budget”, “deficit”, “trade”, “terrorism”, etc.
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