Working Paper: CEPR ID: DP17330
Authors: 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 1980-2011 period, we find that destination risk dominates, followed by idiosyncratic risk. From the counterfactuals, we find that the effect of increased destination market diversification is quantitatively important in reducing aggregate volatility for high volatility countries. On the other hand, reducing specialization increases volatility.
Keywords: output volatility; destination shocks; origin shocks; trade diversification; specialization
JEL Codes: F15; F44; F61
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| origin risk (D81) | aggregate output growth risk (F62) |
| idiosyncratic risk (D81) | aggregate output growth risk (F62) |
| destination market diversification (Z33) | aggregate volatility (E10) |
| reduction in specialization (L59) | aggregate volatility (E10) |
| within-market covariance of destination shocks (F29) | aggregate volatility (E10) |