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Trade openness reduces growth volatility when countries are well diversified

  • Haddad, Mona E.
  • Lim, Jamus Jerome
  • Saborowski, Christian

This paper addresses the mechanisms by which trade openness affects growth volatility. Using a diverse set of export diversification indicators, it presents strong evidence pointing to an important role for export diversification in reducing the effect of trade openness on growth volatility. The authors also identify positive thresholds for product diversification at which the effect of openness on volatility changes sign. The effect is shown to be positive only for a minority of countries with highly concentrated export baskets. This result is shown to be robust to both explicit accounting for endogeneity as well as the inclusion of a host of additional controls.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 5222.

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Date of creation: 01 Feb 2010
Date of revision:
Handle: RePEc:wbk:wbrwps:5222
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  1. Maurice Bun & Frank Windmeijer, 2007. "The weak instrument problem of the system GMM estimator in dynamic panel data models," CeMMAP working papers CWP08/07, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
  2. Andrei A. Levchenko & Julian di Giovanni, 2008. "Trade Openness and Volatility," IMF Working Papers 08/146, International Monetary Fund.
  3. Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, vol. 68(1), pages 29-51, July.
  4. Raddatz, Claudio, 2005. "Are external shocks responsible for the instability of output in low income countries?," Policy Research Working Paper Series 3680, The World Bank.
  5. Windmeijer, Frank, 2005. "A finite sample correction for the variance of linear efficient two-step GMM estimators," Journal of Econometrics, Elsevier, vol. 126(1), pages 25-51, May.
  6. Bejan, Maria, 2006. "Trade Openness and Output Volatility," MPRA Paper 2759, University Library of Munich, Germany.
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