Working Paper: NBER ID: w21498
Authors: Francesco Caselli; Miklós Koren; Milan Lisicky; Silvana Tenreyro
Abstract: A widely held view is that openness to international trade leads to higher GDP volatility, as trade increases specialization and hence exposure to sector-specific shocks. We revisit the common wisdom and argue that when country-wide shocks are important, openness to international trade can lower GDP volatility by reducing exposure to domestic shocks and allowing countries to diversify the sources of demand and supply across countries. Using a quantitative model of trade, we assess the importance of the two mechanisms (sectoral specialization and cross-country diversification) and provide a new answer to the question of whether and how international trade affects economic volatility.
Keywords: trade; GDP volatility; sectoral specialization; country-specific shocks
JEL Codes: E32; F4; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| openness to international trade (F10) | lower GDP volatility (E20) |
| country-specific shocks (F69) | lower GDP volatility (E20) |
| higher sectoral specialization (L52) | lower GDP volatility (E20) |
| decline in trade costs (F19) | significant reductions in GDP volatility (F69) |