Rising geopolitical tensions and talk of a “New Cold War” have revived concerns about trade fragmentation. Yet, systematic evidence on how much political distance reduces trade is still scarce. I introduce political distance, based on UN General Assembly votes, as a novel trade cost in a structural gravity model. Using data on more than 50 years of bilateral and domestic trade among 166 countries, I estimate that an increase in political distance by the average within-pair standard deviation decreases trade by 3.1 percent, about half the effect of removing a regional trade agreement (RTA), controlling for tariffs and RTAs. The effects of past, current, and future political distance are consistent with a causal interpretation. The effect is stronger during periods of heightened political tensions and for simple-to-produce consumer goods and weaker among liberal democracies. Two counterfactuals illustrate that changes in political distance alone can cause sizable welfare redistribution.

Slides on previous version titled "Regionalization of Global Value Chains - Evidence from detailed import data"

We study how county-level migration in the US responds to political state-level shocks. To that end, we examine how the state-level outcomes of toss-up gubernatorial elections affect county-level out-migration. For these toss-up elections, we distinguish counties with a majority for the losing candidate (treatment) and the winning candidate (control). We then show that there are no significant differences in the number of emigrants between treated and control counties pre-election. Post-election, emigration is five percent higher in treated counties. We find that this is mainly driven by increased out-migration from Democratic counties after a Republican win. We rationalize these results in a Roy-Borjas-type selection model with individuals who differ in political views. The model predicts bilateral migration decreases in political distance, which we confirm empirically.

In this study, we investigate how firm expectations about their own developments respond to different types of news. We classify news as either micro or macro, with micro news being information about firm-specific developments and macro news being information about the aggregate economy. Our analysis of firm surveys from Germany and Italy shows that both types of news consistently predict forecast errors, contradicting the idea of full-information rational expectations. Yet while firm expectations overreact to micro news, they underreact to macro news. We propose a model in which firms suffer from "island illusion" to explain these patterns in the data. 

I presented this paper at the 16th Dynare Conference (Slides) and the online seminar of DFG Priority Program "Experience and Expectation"

This chapter revisits survey evidence about firm expectations, with a particular focus on firms’ production and prices. We aim at synthesizing the evidence established on the basis of various firm surveys from different countries. We complement our discussion of existing work with new evidence based on the ifo Survey of German firms. This allows us, first, to put together five stylized facts regarding firm expectations and expectation errors. In addition, we present new evidence regarding the stickiness of firm expectations. Second, we use the same data set to revisit key results regarding the formation of firm expectations. Firm expectations react strongly to firm-specific developments, whereas aggregate variables are less important. Third, we summarize the evidence on how firm expectations drive firm decisions.