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Time-varying impact of global, region-, and country-specific uncertainties on the volatility of international trade
Contemporary Economic Policy  (IF0.943),  Pub Date : 2021-02-18, DOI: 10.1111/coep.12517
Selçuk Gül, Rangan Gupta

We use a dynamic factor model with time-varying parameters and stochastic volatility to decompose the variance of exports and imports over time for 22 Organization for Economic Co-operation and Development countries spanning the quarterly period of 1960:01–2016:04 into contributions from country- and region-specific uncertainties and uncertainty common to all countries. We find that, while idiosyncratic uncertainty has a dominant role in explaining the volatility of international trade, global, country-, and region-specific uncertainties drive around 40% of the volatility of real exports and imports, with the impact of the latter three uncertainties rising in explanatory power during episodes of crises. Our results have important policy implications.