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Openness, Volatility and the Risk Content of Exports

Author

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  • 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

Suggested Citation

  • Julian di Giovanni & Andrei A. Levchenko, 2006. "Openness, Volatility and the Risk Content of Exports," 2006 Meeting Papers 86, Society for Economic Dynamics.
  • Handle: RePEc:red:sed006:86
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    File URL: http://repec.org/sed2006/up.1756.1137680981.pdf
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    References listed on IDEAS

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    1. Tom Krebs & Pravin Krishna & William Maloney, 2010. "Trade Policy, Income Risk, and Welfare," The Review of Economics and Statistics, MIT Press, vol. 92(3), pages 467-481, August.
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    5. Matías Braun & Claudio Raddatz, 2004. "Trade liberalization and the politics of financial development," Working Papers 04-3, Federal Reserve Bank of Boston.
    6. Kevin Cowan & Alejandro Neut, 2007. "Intermediate Goods, Institutions and Output per Worker," Working Papers Central Bank of Chile 420, Central Bank of Chile.
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    12. Ramey, Garey & Ramey, Valerie A, 1995. "Cross-Country Evidence on the Link between Volatility and Growth," American Economic Review, American Economic Association, vol. 85(5), pages 1138-1151, December.
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    Cited by:

    1. repec:blg:journl:v:13:y:2018:i:1:p:29-40 is not listed on IDEAS
    2. Barbara Meller, 2013. "The two-sided effect of financial globalization on output volatility," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 149(3), pages 477-504, September.

    More about this item

    Keywords

    Trade; Output Volatility; Risk Content of Exports;

    JEL classification:

    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General

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