Economic Policy Uncertainty, Firms Behavior and Trade
Date
2023-07
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Abstract
Economic policy uncertainty has increased sharply, especially following the 2008 financial crisis. Policy uncertainty arises from a lack of clarity and predictability about the future course of policies. Consequently, a forum has emerged to identify and discuss its potential effect on economic activities. My thesis offers insights into some of these critical issues, including the significance of the impact of policy uncertainty on trade and investment, the relative impact of policy uncertainty on within-firm and between-firm trade. Also, it identifies the features of industries which amplify the investment effects of policy uncertainty, as well as the institutional mechanisms that can mitigate these effects. Contributing to these policy-relevant discussion expands the usefulness of my research beyond the academic circles to policy making fronts. The general insight from my research is that rising policy uncertainty will not only reduce the volume of trade but alter the organizational structure of multinational firms and hence, how trade is organized. Moreover, industries with competitive input markets and sunk investment costs respond significantly to changes in policy uncertainty. Further, my research maintains that international dispute resolution mechanisms such as the WTO can significantly reduce or eliminate some of the adverse effects of policy uncertainty on economic activities. First, I examine how policy uncertainty affects the organizational structure of multinational firms and the organization of trade. Using US industry data and the difference-in-differences method, I find that higher policy uncertainty reduces the share of trade that occurs between-firm. Second, I test a conjecture that the effect of policy uncertainty on within firm trade and between firm trade increases in the thickness of industry's input market. Using US industry-level trade data and difference-in-difference technique, I find that the differential effect of policy uncertainty increases in the thickness of the input market. Third, I consider the WTO, Free Trade Agreements and Diplomatic Exchanges as international dispute resolution mechanisms and examine their impacts on trade between country pairs that have a history of war. Using bilateral trade flow data, I find that international dispute resolution mechanisms can significantly to the trade growth among nations with a history of war.
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Keywords
Policy Uncertainty, Investment, Trade
Citation
Fosu, F. A. (2023). Economic policy uncertainty, firms behavior and trade (Doctoral thesis, University of Calgary, Calgary, Canada). Retrieved from https://prism.ucalgary.ca.