Does a Regional Trade Agreement Lessen or Worsen Growth Volatility? An Empirical Investigation

Abstract

This paper assesses how regional trade agreements (RTAs) impact on growth volatility for a sample of 170 countries over the period 1978–2012. Notwithstanding concerns that trade openness through RTAs might heighten exposure to shocks, RTAs through enhanced policy credibility, improved policy coordination and reduced risk of conflicts can also ease growth volatility. Empirical estimations suggest the benefits outweigh the costs as RTAs are consistently associated with lower growth volatility. In addition, smaller economies benefit more from the reduced growth volatility associated with RTAs than larger ones. The nature of the RTA also matters as shallow agreements such as partial‐scope preferential trade agreements do not appear to have a significant effect on growth volatility, whereas free trade areas and customs unions do. Finally, in investigating the drivers of RTAs, the regression results confirm that countries that are more prone to shocks are more likely to join an RTA, in particular with countries with relatively less volatile growth.

Public and private pension systems and macroeconomic volatility in OECD countries

“…(1) and (2) summarise the results of the simple panel regression using Least Squares Fixed Effects estimations, while Columns (3) and (4) list the results of the dynamic panel regression using Bias-Corrected LSDV. Dabla-Norris and Srivisal (2013) and Rumler and Scharler (2011) use time-fixed effects in their specifications, whereas more recent studies, Kpodar and Imam (2016) and Kpodar et al (2019) did not account for time-fixed effects when analysing growth volatility. Even though we find that most time dummies are not statistically significant, the F-test indicates that the time-fixed effects are mutually significantly different from zero.…”

“…The results for real GDP per capita, gross fixed-capital formation and private final consumption are consistent with those already presented in Section 4. Kpodar and Imam (2016) and Kpodar et al (2019) introduced an alternative approach to measure economic volatility. Their approach relied on the assumption that the long-term component of the real GDP per capita follows an AR (1)-process with a time-trend.…”

Financial Deepening, Terms of Trade Shocks, and Growth Volatility in Low-Income Countries

“…Given that the theory does not offer a clear-cut answer, the empirical analysis could help uncover the direction and magnitude of the impact. To this effect, this paper adopts a linear model with the following specification, drawing on Kpodar and Imam (2016):…”

“…However, this approach relies on strong assumptions regarding the functional form of the long-term component. Following Kpodar and Imam (2016) and Chauvet et al (2018), we use instead a more flexible approach, assuming that the long-term component follows an AR (1) process with a trend as follows:…”

Financial Deepening, Terms of Trade Shocks, and Growth Volatility in Low-Income Countries

“…To this effect, this paper adopts a linear model with the following specification, drawing on Kpodar and Imam (2016):…”