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Trade Uncertainty and Investment in the Euro Area

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  • Mr. Christian H Ebeke
  • Jesse Siminitz

Abstract

We analyze the impact of trade policy uncertainty on investment in the euro area. Our identification strategy assumes that countries that are relatively more dependent on global trade networks exhibit a higher sensitivity of investment with respect to trade uncertainty. We find that the investment-to-GDP ratio is on average 0.8 percentage points lower for five quarters following a one standard deviation increase in the level of trade uncertainty. We demonstrate that these results are unlikely to be driven by omitted variables and that they are robust to different measures of trade uncertainty and trade openness. Our analysis suggests that the detrimental effect of trade tensions goes beyond lower trade growth, as uncertainty can reduce investment and the economy’s long-term growth potential.

Suggested Citation

  • Mr. Christian H Ebeke & Jesse Siminitz, 2018. "Trade Uncertainty and Investment in the Euro Area," IMF Working Papers 2018/281, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2018/281
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    References listed on IDEAS

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    Cited by:

    1. Cristina Constantinescu & Aaditya Mattoo & Michele Ruta, 2020. "Policy Uncertainty, Trade and Global Value Chains: Some Facts, Many Questions," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 57(2), pages 285-308, September.
    2. Mohsen Bahmani-Oskooee & Jungho Baek, 2021. "Exchange rate volatility and domestic investment in G7: are the effects asymmetric?," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 48(3), pages 775-799, August.
    3. Oguzhan Cepni & David Gabauer & Rangan Gupta & Khuliso Ramabulana, 2020. "Time-Varying Spillover of US Trade War on the Growth of Emerging Economies," Working Papers 202002, University of Pretoria, Department of Economics.
    4. Arigoni, Filippo & Lenarčič, Črt, 2020. "The impact of trade policy uncertainty shocks on the Euro Area," MPRA Paper 100832, University Library of Munich, Germany.
    5. Klein, Paul-Olivier & Turk-Ariss, Rima, 2022. "Bank capital and economic activity," Journal of Financial Stability, Elsevier, vol. 62(C).
    6. Wu, Chao & Zhao, Ke & Liu, Jinquan & Zhao, Xiuyi, 2024. "Cross-country spillovers of trade uncertainty and their formation mechanisms," Finance Research Letters, Elsevier, vol. 66(C).
    7. Gnangnon, Sèna Kimm, 2023. "Duration of membership in the world trade organization and investment-oriented remittances inflows," The Quarterly Review of Economics and Finance, Elsevier, vol. 88(C), pages 258-277.
    8. Gnangnon, Sèna Kimm, 2022. "Duration of WTO Membership and Investment-Oriented Remittances Flows," EconStor Preprints 251274, ZBW - Leibniz Information Centre for Economics.

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