TITLE:
Backfiring Effect of Uncertain Trade Policy
AUTHORS:
Yasunori Fujita
KEYWORDS:
Backfiring Effect, Uncertain Trade Policy, Optimal Stopping Theory, Value of Waiting
JOURNAL NAME:
Modern Economy,
Vol.7 No.5,
May
18,
2016
ABSTRACT: Constructing a
stochastic international trade model where exporting firm faces uncertain trade
policy expressed by geometric Brownian motion, we examine the effect of an
increase in the trade policy uncertainty on the optimal start time of export. It
is revealed that when the trade policy is less uncertain than a threshold
level, an increase in the trade policy uncertainty accelerates the optimal
exporting timing of export, which is in sharp contrast to the standard result
that an increase in the uncertainty postpones the optimal timing. It is also
revealed that such a stochastic version of the backfiring effect reduces the
world welfare if demand for exported products is low, starting export is costly
or future is not important.