Trade Openness and Volatility

includes country×sector fixed effects. Nonetheless, the results are statistically significant
at the one percent level in each case. Overall, the cross-sectional and panel results yield
remarkably similar conclusions.

The effect of trade on volatility, while highly significant, is not implausibly large quan-
titatively. In particular, a one standard deviation increase in our right-hand side trade
variable, the log of exports plus imports to output, results in an increase in the log variance
of output per worker growth of between 0.1 and 0.25 standard deviations, depending on the
coefficient estimate used.

Appendix Tables A3 and A4 present a slew of robustness checks using a variety of
different controls and interaction terms. The coefficient of interest remains positive and
significant at 1% level across all specifications, and the point estimates do not vary dramat-
ically relative to the baseline estimates in Tables 1 and 2, columns (4) and (7) respectively.
First, turning to columns (1) and (2) in Table A3, it is clear that using either average
productivity or average growth rates instead of initial output per worker does not alter our
results. As discussed above, both of these variables are positively related to volatility at
sector level, a result reported in Imbs (2006). Column (3) drops country effects, and uses
the volatility of a country’s terms of trade (TOT) instead. Terms of trade data are obtained
from the Penn World Tables. TOT volatility is indeed positively related to volatility of pro-
duction, but trade openness itself remains significant. The TOT volatility on its own was
controlled for in our baseline regressions by country and country×time effects. However, it
could be that TOT volatility affects more open sectors disproportionately, and this effect is
driving our results. Column (4) interacts the country-level TOT volatility with total trade
in a sector while including country fixed effects, which is a more general specification than
including TOT volatility on its own. Our main result is not affected, in fact the coefficient
on this interaction is insignificant. It could also be that what really matters is not the
average trade openness in a sector, but the volatility of trade in that sector. To see if this is
the case, we control for the sector-level volatility of trade in Column (5). It turns out that
the coefficient on the volatility of trade is not significant, giving us further confidence that
simultaneity is not a major issue.¹³ We also interact the level of trade with its volatility
in Column (6), but the main result is unchanged. Column (7) uses another country-level
variable, the share of manufacturing trade to total trade, instead of country effects. This
share is negatively related to the volatility of production, which may simply reflect that
the share is greater for industrial countries, which experience less volatility on average.¹⁴

¹³We also experimented with the volatility of a sector’s trade-to-output ratio, but results were similar to
using total trade.

¹⁴We also interacted this variable with sector-level trade. Our results were unchanged.

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