Trade Openness and Volatility

Julian di Giovanni and Andrei A. Levchenko
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Julian di Giovanni: International Monetary Fund

The Review of Economics and Statistics, 2009, vol. 91, issue 3, pages 558-585

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.

Date: 2009
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Working Paper: Trade Openness and Volatility (2006)
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