The volatility of international trade flows in the 21st century: whose fault is it anyway ?

Federico Roberto Bennett, Daniel Lederman, Samuel Pienknagura and Diego Rojas

No 7781, Policy Research Working Paper Series from The World Bank

Abstract: After investment, exports and imports are the most volatile components of aggregate demand within countries. Moreover, the volatility of growth and the volatility of trade flows tend to move together; they declined from the 1990s until 2009, followed by an increase since 2009. This paper explores the drivers of such movements in trade-flow volatility. The analysis decomposes trade growth into six components to study their contribution to the overall volatility of trade flows, and presents three findings. First, trade volatility is mostly explained by a factor common to all countries, country-specific factors, and changes in the gravity-related characteristics of a country's trading partners. Product composition and the identity of trading partners appear to be less important in explaining volatility. Second, the pre-2009 decline in volatility and the post-2009 increase in volatility appear to be driven by different factors. The former is mostly explained by a steady decline in the variance of country-specific factors. In contrast, the latter appears to be driven mainly by an increase in the volatility of factors common to all countries. Third, trade diversification is a likely force behind the steady decline in trade volatility driven by country-specific factors, especially in developing countries.

Keywords: Economic Stabilization; International Trade and Trade Rules (search for similar items in EconPapers)
Date: 2016-08-04
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Citations: View citations in EconPapers (2)

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