Time-varying impact of global, region-, and country-specific uncertainties on the volatility of international trade

Abstract

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.