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 generated significant business uncertainty. Recent investment theory suggests that increased cash-flow uncertainty can depress investment. We use cross-sectional net investment data to estimate an investment model augmented by two measures of international exposure (imported inputs and export markets). The exposure variables allow us to test whether trade regime uncertainty played a significant macroeconomic role in the early years of the Great Depression. International exposure proves important in explaining investment behavior at the start of the downturn (1929) but not in later years (1930-1933).