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Diversification through Trade

Silvana Tenreyro (), Miklós Koren and Francesco Caselli ()

No 539, 2012 Meeting Papers from Society for Economic Dynamics

Abstract: Existing wisdom links increased openness to trade to greater macroeconomic volatility, as trade induces a country to specialize, increasing its exposure to sector-specific shocks. Evidence suggests, however, that country-wide shocks are at least as important as sectoral shocks in shaping volatility patterns. We argue that if country-wide shocks are dominant, the impact of trade on volatility can be negative, because trade becomes a source of diversification. For example, trade allows domestic goods producers to respond to shocks to the domestic supply chain by shifting sourcing abroad. Similarly, when a country has multiple trading partners, a domestic recession or a recession in any one of the trading partners translates into a smaller demand shock for its producers than when trade is more limited. Using a calibrated version of the Eaton-Kortum and Alvarez-Lucas model, we quantitatively assess the impact of lower trade barriers on volatility since the 1970s in a broad group of countries.

New Economics Papers: this item is included in nep-dge, nep-int and nep-opm
Date: 2012
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Related works:
Working Paper: Diversification through Trade (2015) Downloads
Working Paper: Diversification through Trade (2015) Downloads
Working Paper: Diversification through Trade (2015) Downloads
Working Paper: Diversification through trade (2015) Downloads
Working Paper: Diversification through trade (2015) Downloads
Working Paper: Diversification through Trade (2015) Downloads
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