Trade Openness and Volatility

Abstract

This paper examines the mechanisms through which output volatility is related to trade openness using an industry-level panel data set of manufacturing production and trade. The main results are threefold. First, sectors more open to international trade are more volatile. Second, trade is accompanied by increased specialization. These two forces imply increased aggregate volatility. Third, sectors that are more open to trade are less correlated with the rest of the economy, an effect that acts to reduce overall volatility. The point estimates indicate that each of the three effects has an appreciable impact on aggregate volatility. Added together they imply that the relationship between trade openness and overall volatility is positive and economically significant. Copyright by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.

Volatility and diversification of exports: Firm-level theory and evidence

“…Imperfect knowledge of local conditions may also leave exporters more vulnerable to cost or demand shocks in foreign markets. A number of studies suggest that exports are more volatile than domestic sales (Vannoorenberghe, 2012) and that openness to trade -at least in some cases -raises the volatility of output at the level of sectors (di Giovanni and Levchenko, 2009) or countries (Rodrik, 1998).…”

“…Rodrik, 1998;Easterly et al, 2001;Bejan, 2006;di Giovanni and Levchenko, 2009). Caselli et al (2014) show that, at the macroeconomic level, the diversification of sales across countries made possible by international trade can act as a source of stability.…”

The Credibility of Fiscal Rules Policy and Business Cycle Volatility

“…The relationship between trade openness and overall volatility is found to be positive (Giovanni and Levchenko, 2009); political instability tends to increase volatility (Dutt and Mitra, 2008); geography and institutions also play a role, as remote countries are more likely to experience greater volatility in output growth (Malik and Temple, 2009). Finally, Fountas and Karanasos (2007) find mixed evidence regarding the relationship between inflation and volatility of the output growth.…”

“…In fact, the fluctuations of the output growth crucially determine a large number of economic outcomes (Giovanni and Levchenko, 2009) and therefore also the perceived success or failure of economic policies. Higher output volatility is shown to be connected to lower private investment (Aizenman and Marion, 1999), substantial welfare effects (Barlevy, 2004), and eventually also to lower long-run economic growth (e.g., Ramey and Ramey, 1995;Imbs, 2007).…”

Openness of the Economy, Diversification, Specialization, and Economic Growth

“…Imbs (2004) and Giovanni and Levchenko (2009) showed that there is a strong tie between specialization and economic volatility. Beine and Coulombe (2007), Ortiz (2012), and Elhiraika, Abuouhakar, and Muhammad (2014) found that diversification should be promoted for growth.…”