The effects of global economic policy uncertanities on international trade flows of emerging markets: Panel structural VAR analysis

In this study, the impacts of global economic policy uncertainties (GEPU) on the foreign trade performance of developing countries are analyzed with the help of monthly frequented unbalanced panel data covering the period 2003:01-2019:12. The empirical analysis is performed by the structural Panel VAR approach proposed by Pedroni (2013) which allows full heterogeneity among panel units. The series of GEPU variables are estimated using the factor-based partial least squares (PLS) approach applied to the economic policy uncertainty (EPU) series of 24 countries derived by Baker et al.(2016). The impulse response function results of the structural Panel VAR model show that GEPU negatively affects export and import flows. According to the results of impulse-response functions, income and exchange rate variables have an expanding effect on export and import volumes. Variance decomposition outputs point out that the variance of exports and imports is explained mostly by the income variable, and GEPU is the second most effective variable for explaining exports and imports movements. It is realized that the exports and imports of developing countries have approximately similar reactions to the variables in the model, and it is deduced that this situation occurs depending on the international supply chains relationships.The Structural Panel VAR approach not only allows full heterogeneity but also provides estimations of impulse response functions for each panel member separately. The results of the second-stage least squares model, in which the estimated impulse response functions on the basis of each panel unit are taken as the dependent variable, indicated that the negative effects of GEPU on exports are diminished as expanding of the sectoral diversity of exports. The GEPU effects on export volume are multiplied as the technology content of exports increases. On the other side, unfavorable GEPU impacts on import flows are softened as the import dependency of the country's economies increases and they are not affected by sectoral diversification of import.