uncertainty are combined with a major credit crunch one can expect a high initial discrepancy between durable and non-durable consumption due to both financial constraints and elevated uncertainty levels.

The final set of results shown in Figure 5 documents the response of international trade to uncertainty. We augment Bloom’s original specification with the effective exchange rate and aggregate imports and exports. We do not include consumption expenditures in this estimation. Because of monthly data availability the sample is almost 20 years shorter, starting only in January 1980. Reassuringly, despite using a shorter sample and omitting some of the shocks, the response of industrial production is almost unchanged. As shown in Figure 5 the reactions of aggregate imports and exports to a rise in domestic uncertainty differ considerably. Exports experience a short sharp increase after which they drop almost immediately to their previous path. In contrast, imports drop dramatically and the negative response is protracted. We do not have sufficiently long monthly time series to estimate the impact on the durables and non-durables components of trade separately.<sup>5</sup> Therefore, based on previous findings, one could speculate that most of the initial drop is driven by the durable component of imports while the protracted nature is primarily due to the non-durable part. Both imports and exports respond very similarly to changes in the stock market index. The increases in wealth leads to a rise of both above trend for an extended period. A contractionary monetary policy leads to an initial short lived rise in aggregate imports that soon converts into a protracted drop. A potential explanation for this is that initially the appreciation brought by a rise in interest rates makes foreign goods cheaper, however, over time the restrictive effects induced by financial constraints take over and reduce imports. Surprisingly, exports also rise in response to a hike in the federal funds rate. Even though, one would expect a negative effect on exporters via financial constraints and appreciation, a potential explanation for this result is that the biggest exporters responsible for most of the aggregate exports are less financially constrained and with the contraction of the domestic demand might be more aggressive in selling their products abroad.

In sum, it seems that uncertainty matters in an international setting, particularly for imports. In the subsequent sections we look at whether the preliminary results provided by the VAR analysis conducted on US data carry through to an international setting. Specifically, we will be focusing on the impact on exports of importer uncertainty. This, based on the preliminary results, is expected to be more important for exporters than uncertainty experienced at home.

# **4 Importer uncertainty in bilateral trade data**

## **4.1 Methodology**

In accordance with the theoretical insights summarized above and with results from the VAR analysis, we focus on the effects of importer uncertainty on trade flows over the period 1990-2009. We examine the evolution of quarterly trade flows by means of a model of bilateral trade. The use of bilateral trade allows us to assess the effect of foreign uncertainty while controlling for domestic developments and additional

> 5To our knowledge, the only cross-country dataset reporting monthly (and quarterly) bilateral trade data is Trade Map of the International Trade Centre (ITC). Market Access Map, Market Analysis Tools, International Trade Centre, www.intracen.org/marketanalysis which provides data series starting in 2005 only.

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