Working Paper: NBER ID: w16005
Authors: Julian Di Giovanni; Andrei A. Levchenko
Abstract: It has been suggested that countries which export in especially risky sectors will experience higher output volatility. This paper develops a measure of the riskiness of a country's pattern of export specialization, and illustrates its features across countries and over time. The exercise reveals large cross-country differences in the risk content of exports. This measure is strongly correlated with terms-of-trade and output volatility, but does not exhibit a close relationship to the level of income, overall trade openness, or other country characteristics. We then propose an explanation for what determines the risk content of exports, based on the theoretical literature exemplified by Turnovsky (1974). Countries with comparative advantage in the safe sectors or strong enough comparative advantage in the risky sectors will specialize, whereas countries whose comparative advantage in the risky sectors is not too strong will diversify their export structure to insure against export income risk. We use both non-parametric and parametric techniques to demonstrate that these theoretical predictions are strongly supported by the data.
Keywords: International Trade; Export Risk; Macroeconomic Volatility
JEL Codes: F15; F40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| risk content of exports (F10) | macroeconomic volatility indicators (E32) |
| risk content of exports (F10) | output volatility (E23) |
| comparative advantage in risky sectors (F12) | export specialization (F10) |
| weaker comparative advantages in risky sectors (F12) | export diversification (F29) |
| degree of specialization in risky sectors (G19) | export diversification (F29) |