Kerem Cosar from University of Virginia will present "The Baltic Exchange: Weather Risk and International Trade in Early Modern Europe", with Simon Alder and Jonathan Colmer.
Local weather shocks such as droughts or heat waves can severely affect economic activity, especially in the agricultural sector. Since such events vary across space, regions that are hit by a temporary negative shock could potentially be insured by other regions through imports. In this paper, we test whether long-distance trade serves as such a risk-sharing mechanism. We do so by using historical data from mid-seventeenth to mid-nineteenth century when the Baltic region was a prominent source of grains for western Europe. Controlling the straits between the Baltic and the North Sea during this time period, the Danish Crown taxed and recorded every ship transiting through. Using recently digitized records of these passages, we construct a panel of bilateral agricultural trade flows between origin and destination ports, and match it with historical weather data for the ports’ hinterlands. We test and confirm the predictions of a textbook model of supply and demand in the cross-section, time-series and panel dimensions. We finish with qualitative evidence documenting the occurrence of famines when policy interventions impeded free trade.