# **5.4 Durables vs. non-durables**

Much of the previous literature implies that the effect of an uncertainty shock should be channeled primarily through durable consumption, although there is no consensus on the extent to which the relationship at the microeconomic level translates into macroeconomics. In order to assess this nexus we would need bilateral monthly data by product category. As discussed earlier in the paper, these data are not available for a wide set of countries and for a sufficiently long time span. Hence, we use an indirect method to categorize trade by its durability. We compute the share of durables exported by exporter _o_ to importer _d_ as a share of total imports of _d_ . We identify the shares of durables by combining ISIC3 industry level trade data from Comtrade with the classification of durable and non-durable industries compiled by Kroszner et al. (2007). Then we order all the relationships of an importer by their durability, split them into quartiles and estimate separate regressions for each quartile. In our definition the top quartile refer to relationships most intensive in durables trade. For example looking at the US as an importer the relationship most intensive in durables is with Japan from where more than 80% of total imports comprise durable goods. The relationship with lowest durability is with New Zealand that only provides 28% durables in its total exports to the United States.

Tables 8 and 9 show that most of the negative effect of uncertainty on trade is generated by relationships that fall into the second and third quartile of durability. Uncertainty shocks are found to have an insignificant effect in the relationships in the top and bottom quartiles of durability. Without an explicit test of durability that uses industry level data, we cannot unambiguously determine the differential impact of uncertainty on goods of different durability. Despite this however, the lack of significance for the effect of uncertainty on the bottom quartile of durability confirms that the latter is an important dimension for explaining the relationship between uncertainty and trade. On the other hand, the results for the top quartile of durability are more puzzling. There are several possible explanations for the lack of significance of this set of trade flows in our data. Supply chain considerations, the possibility that relationships with highest durability are also important in absolute terms or compositional and substitution effects may have a bearing on the results. For example importers facing an uncertainty shock on the domestic market may be securing the most durable goods because these are fundamental components to their exports in the context of supply chains. Alternatively, consumers may be substituting from more durable to less-durable goods bought from the same partner with the result that the aggregate bilateral trade between two countries remains unaffected. In combination with the VAR analysis, these results suggest that the relationship between uncertainty shocks and durability deserves further analysis concerning the size and timing of both the contraction and the recovery pattern.

# **5.5 Prior experience with uncertainty shocks**

To conclude our analysis we assess whether prior experience or more generally high frequency of shocks affects the reaction of importers to uncertainty. One could expect that countries that are often subject to volatility would react in a less extreme way to yet another uncertainty shock.<sup>7</sup> However, as Tables 10

> 7The limitation of this analysis is that prior experience with uncertainty shocks might already be reflected in the level of volatility itself, i.e. in a country with frequent shocks the same event might lead to a lower increase in volatility compared

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