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Openness, Volatility and the Risk Content of Exports

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Author Info

  • Julian di Giovanni

    () (Middle East and Central Asia International Monetary Fund)

  • Andrei A. Levchenko

Abstract

It has been observed that more open countries experience higher output growth volatility. This paper uses an industry-level panel dataset of manufacturing production and trade to analyze the mechanisms through which trade can affect the volatility of production. We find that sectors with higher trade are more volatile and that trade leads to increased specialization. These two forces act to increase overall volatility. We also find that sectors which are more open to trade are less correlated with the rest of the economy, an effect that acts to reduce aggregate volatility. The point estimates indicate that each of the three effects has an appreciable impact on aggregate volatility. Added together they imply that a one standard deviation change in trade openness is associated with an increase in aggregate volatility of about 15% of the mean volatility observed in the data. The results are also used to provide estimates of the welfare cost of increased volatility under several sets of assumptions. We then propose a summary measure of the riskiness of a country's pattern of export specialization, and analyze its features across countries and over time. There is a great deal of variation in countries' risk content of exports, but it does not have a simple relationship to the level of income or other country characteristics

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File URL: http://repec.org/sed2006/up.1756.1137680981.pdf
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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number 86.

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Date of creation: 03 Dec 2006
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Handle: RePEc:red:sed006:86

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Keywords: Trade; Output Volatility; Risk Content of Exports;

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References

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  1. Attanasio, Orazio & Davis, Steven J, 1996. "Relative Wage Movements and the Distribution of Consumption," Journal of Political Economy, University of Chicago Press, vol. 104(6), pages 1227-62, December.
  2. Tom Krebs & Pravin Krishna, 2005. "Trade Policy, Income Risk and Welfare," 2005 Meeting Papers 271, Society for Economic Dynamics.
  3. Matías Braun & Claudio Raddatz, 2004. "Trade liberalization and the politics of financial development," Working Papers 04-3, Federal Reserve Bank of Boston.
  4. Kevin Cowan & Alejandro Neut, 2007. "Intermediate Goods, Institutions and Output per Worker," Working Papers Central Bank of Chile 420, Central Bank of Chile.
  5. Stephane Pallage & Michel A. Robe, 2003. "On the Welfare Cost of Economic Fluctuations in Developing Countries," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(2), pages 677-698, 05.
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Cited by:
  1. Paolo Epifani & Gino Gancia, 2005. "Openness, government size and the terms of trade," Economics Working Papers 915, Department of Economics and Business, Universitat Pompeu Fabra, revised Jan 2008.
  2. Olaberria, Eduardo & Rigolini, Jamele, 2009. "Managing East Asia's macroeconomic volatility," Policy Research Working Paper Series 4989, The World Bank.
  3. Liu, Xuan, 2007. "Trade Openness and the Cost of Sudden Stops: The Role of Financial Friction," MPRA Paper 18260, University Library of Munich, Germany, revised 26 Oct 2009.

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