INVESTMENT DURING THE GREAT-DEPRESSION - UNCERTAINTY AND THE ROLE OF THE SMOOT-HAWLEY TARIFF

The political process that led to the Smoot-Hawley tariff likely gener ated significant business uncertainty. Recent investment theory sugges ts that increased cash-flow uncertainty can depress investment. We use cross-sectional net investment data to estimate an investment model a ugmented by two measures of international exposure (imported inputs an d export markets). The exposure variables allow us to test whether tra de regime uncertainty played a significant macroeconomic role in the e arly years of the Great Depression. International exposure proves impo rtant in explaining investment behavior at the start of the downturn ( 1929) but not in later years (1930-1933).