When Uncertainty Hits Home: Export Exposure & Regional Economic Performance : Regional Evidence from Sweden

Sammanfattning

This paper investigates whether economic policy uncertainty (EPU) is heterogeneously associated with regional economic performance in Sweden, with export exposure as the key channel of interest. Motivated by the real option framework of Bernanke (1983) and Dixit & Pindyck (1994), and by Armelius et al. (2017), who document that domestic and foreign EPU are negatively associated with aggregate Swedish GDP, we examine whether these patterns vary systematically with municipalities’ integration into international markets. Using a two-way fixed-effects model in a panel dataset of Swedish municipalities over 2000-2023, we interact both the Swedish EPU index and the Global Economic Policy Uncertainty (GEPU) index with a municipality-level measure of export exposure, constructed as the employment share in mining and manufacturing at the start of the sample period. The results indicate that increases in both indices are negatively associated with regional output, and that this association is larger in municipalities with higher export exposure. Distributed lag specifications show that the negative association persists for at least one additional year, indicating that the relationship persists beyond the contemporaneous period. Quartile analysis further reveals that the association is concentrated among the most export-intensive municipalities. Robustness tests provide mixed support, with the baseline associations sensitive to municipality-specific linear trends and split-sample estimation across subperiods. The findings suggest that nationally aggregated EPU estimates may obscure significant within-country heterogeneity in how uncertainty relates to local economic outcomes, and that policymakers should account for regional industrial structure when designing stabilization responses to uncertainty shocks.