Home / / Effect of Trade Policy Uncertainty on the Risk of Developing Countries: An Emprical Analysis

Effect of Trade Policy Uncertainty on the Risk of Developing Countries: An Emprical Analysis

Filiz ERYILMAZ
Derya YILMAZ

Abstract
Following the Global Financial Crisis, protectionist policies have been widely used by countries. Since 2018, these policies have been evolved into a trade war between United States (US) and China. The tariff escalation and the trade disputes between US and China has also side effects on the other countries: it creates trade policy uncertainty. Funds flow from developing countries to the safe heaven countries when the trade policy uncertainty is mounted up. This means a capital outflow for developing countries which in turn pile up these countries’ risks. In this study, we aimed to search for the relationship between trade policy uncertainty and developing countries’ risks. We used an instrument that rested upon Google Trend data following Cebreros, Chiquiar, Heffner and Salcedo (2018) as a proxy for trade policy uncertainty. We also employed JP Morgan EMBI Global Spread as a proxy for developing countries’ risk. VAR model and impulse-response functions were utilized in the study. The finding of our empirical model suggests that trade policy uncertainty has a positive effect on developing countries’ risks and this effect disappears in ten weeks.
Keywords: Trade Policy Uncertainty, Protectionism, Developing Countries, VAR Analysis, Impulse-Response Functions.
Jel Codes: C32, F02, F13

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