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Does A Regional Trade Agreement Lessen or Exacerbate Growth Volatility? An Empirical Investigation

Kangni Kpodar and Patrick Imam

No 2015/177, IMF Working Papers from International Monetary Fund

Abstract: This paper assesses how regional trade agreements (RTAs) impact growth volatility on a worldwide sample of 170 countries with data spanning the period 1978-2012. Notwithstanding concerns that trade openness through RTAs can heighten exposure to shocks, in particular when it leads to increased product specialization, RTAs through enhanced policy credibility, improved policy coordination, and reduced risk of conflicts can ease growth volatility. Empirical estimations suggest the benefits outweigh the costs as RTAs are consistently associated with lower growth volatility, after controlling for trade openness and other determinants of growth volatility. Furthermore, regression results also suggest that countries that are more prone to shocks are more likely to join a RTA, in particular with countries with relatively less volatile growth, additionally enhancing the stabilization effect.

Keywords: WP; growth volatility; regional trade agreement; trade openness; RTA member; trade partner; standard deviation; mega-RTAs agreement; growth rate; RTA dummy variable; affect growth volatility; trade creation; RTA member country; Regional trade; Exports; Imports; Trade agreements; Terms of trade; West Africa; Global (search for similar items in EconPapers)
Pages: 37
Date: 2015-07-28
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Handle: RePEc:imf:imfwpa:2015/177