therefore to analyze empirically the effect of importer uncertainty on exports. We do so using a dataset of bilateral trade between 32 developed and developing countries. We find that elevated uncertainty has significant negative effects on trade even when controlling for potentially confounding factors such as financial constraints and reductions in wealth, that tend to accompany major uncertainty periods. In line with our expectations, the negative effect of uncertainty shocks on trade is higher for trade relationships more intensive in durable goods. Surprisingly however, the relationship is non-linear: we find that the top trade relationships in durables intensity are resilient to uncertainty. Supply chain considerations or the possibility that the relationships with the highest durability lead to important compositional effects may have a bearing on the results. This finding calls for additional research on the linkages between durability, uncertainty and trade. Lack of intra-annual bilateral data by product category however does not allow us to identify better the role played by durability. We also show that prior experience with major uncertainty shocks does not reduce the effect on trade, i.e., we do not find evidence of learning from prior shocks that would help smooth out the adverse impact. Finally, the response of trade to uncertainty in the 2008-2009 crisis reflected the behavior of trade in past confidence crises. The difference was in the size of the drop and subsequent recovery which was much stronger in the most recent crisis compared to the past.

The rest of the paper is organized as follows. Section 2 reviews the insights from the theory and discusses the predictions for the impact of uncertainty on aggregate trade. Section 3 provides a preliminary empirical analysis using the U.S. data. Section 4 discusses our methodology and data. Section 5 brings the empirical investigation to an international setting. By means of a dynamic bilateral model it investigates the impact of exceptional uncertainty on imports and tests the main predictions outlined in Section 2. Finally, Section 6 concludes and draws the implications of our results.

# **2 Producer and consumer uncertainty**

The fact that a temporary increase in uncertainty can cause an immediate drop in investment is discussed in Bernanke (1983) and extended to the effects of income uncertainty on consumer spending by Romer (1990). At the same time, Dixit (1989a) shows that, in making entry and exit decisions, uncertainty about future prices creates an option value of waiting until more information about the state of the world is received. The generality of the idea is perfected and shown to have many applications in Dixit and Pindyck (1994). Building on a body of literature that became very rich in the past two decades, a recent paper (Bloom, 2009) provides a structural framework to analyze the effect of uncertainty shocks jointly on investment and hiring. In the following sections we will summarize the key concepts from this body of research and explain how this applies to international trade.

## **2.1 Producer uncertainty**

Bernanke (1983) discusses how an increase in the cost of credit intermediation can account for the link between uncertainty and investment spending. Later research (Dixit, 1989a; Dixit and Pindyck, 1994) emphasizes that the changes in investment spending are the outcome of decisions that are very often 4