Trade dynamics under policy uncertainty

The article studies the link between the perceived length of a policy and the responses of inventory and investment during the worldwide ban of imported beef from Canada following the discovery of a cow infected with bovine spongiform encephalopathy (BSE). The actual ban lasted approximately 3 months. The calibrated model generates a 59% decrease in investment compared with a 55% decline in the data. The price series is the Farm Product Price Index for cattle and calves from Statistics Canada. Between May and July, prices fell more than 60%. Prices rebounded in September as the ban was lifted, but did not return to pre-ban levels. This is partially explained by the fact that prices before the BSE discovery were at a cyclically high point in early 2003. If the expected improvement is small, or perceived as unlikely, producers will liquidate their stocks to save on inventory costs.