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Growth Volatility and Trade: Market Diversification vs. Production Specialization

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  • Adina Ardelean
  • Miguel Leon-Ledesma
  • Laura Puzzello

Abstract

We analyze how trade affects aggregate volatility using a multi-country, multi-industry, and multi-destination framework. We decompose aggregate output growth risk into destination risk, origin risk, and idiosyncratic risk (and their covariances). We then use this framework to run counterfactuals changing the degree of destination market diversification (including home) and industry specialization. Using data on 19 industrial sectors, 34 countries, and 85 destination markets for the 1980¨C2011 period, we find that destination risk dominates, followed by idiosyncratic risk. From the counterfactuals, we find that the effect of increased destination market diversifi- cation is quantitatively important in reducing aggregate volatility for high volatility countries. On the other hand, reducing specialization increases volatility.

Suggested Citation

  • Adina Ardelean & Miguel Leon-Ledesma & Laura Puzzello, 2022. "Growth Volatility and Trade: Market Diversification vs. Production Specialization," Studies in Economics 2202, School of Economics, University of Kent.
    • Handle: RePEc:ukc:ukcedp:2202
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    More about this item

    Keywords

    Output Volatility; Destination Shocks; Origin Shocks; Trade Diversification; Specialization;
    All these keywords.

    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles
    • F61 - International Economics - - Economic Impacts of Globalization - - - Microeconomic Impacts

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