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Political Risk and Export Promotion: Evidence from Germany
Author(s) -
Moser Christoph,
Nestmann Thorsten,
Wedow Michael
Publication year - 2008
Publication title -
world economy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.594
H-Index - 68
eISSN - 1467-9701
pISSN - 0378-5920
DOI - 10.1111/j.1467-9701.2008.01102.x
Subject(s) - obstacle , economics , promotion (chess) , politics , order (exchange) , political risk , panel data , transaction cost , gravity model of trade , trade promotion , control (management) , empirical evidence , international trade , international economics , microeconomics , econometrics , free trade , finance , epistemology , political science , law , philosophy , management
Political risk represents an important hidden transaction cost that reduces international trade. This paper investigates the claim that public export credit guarantees mitigate this friction to trade flows and hence promote exports. We employ an empirical trade gravity model, where we explicitly control for political risk in the importing country in order to evaluate the effect of export guarantees. Using a novel data set on guarantees, we estimate the effect of guarantees in a static and dynamic panel model. We find a statistically and economically significant positive effect of public export guarantees on exports which indicates that export promotion is indeed effective. Furthermore, political risk turns out to be an important obstacle for exports and hence should be taken into account in any empirical model of trade.