the comovement effect. By contrast, moving from the 25th to the 75th percentile in the
distribution of ρ hardly changes anything. The net effect is positive, but the increase in
overall volatility due to trade is only 5 percent higher for the more correlated country.
Differences in h change the impact of trade appreciably, but much less than differences in
σ2 : moving from the 25th to the 75th percentile in the distribution of h increases the overall
impact of trade by a factor of 1.6.
To summarize, the impact of trade opening on aggregate volatility varies a great deal
depending on country characteristics. For instance, the impact of the same trade opening
is likely to be five times higher in absolute terms for a typical developing country compared
to a typical developed country. Furthermore, the country characteristic that is by far most
responsible for the differences in estimated impact of trade is sector-level volatility. The
impact of trade on aggregate volatility is highest for countries whose sectors are already most
volatile on average. Its magnitude is such that it cannot be ignored when considering the
effects of trade opening in developing countries. Note that this estimated impact of trade
is obtained controlling for a wide variety of country characteristics, such as institutions,
macroeconomic policies, or the overall level of development.
4.3 Changes in the Impact on Aggregate Volatility across Decades
The final exercise we perform is to estimate how the impact of trade on aggregate volatility
changes over time. For this calculation, we reestimate our three baseline specifications in
the previous section by decade. This allows us to obtain potentially different coefficients
for βbσ , βbρ, and βbh to use in our magnitude calculations. We also evaluate σ2 , ρ, h, and σA-
at their means within each individual decade. The results of estimating the β,s by decade
are presented in Table 8, while the summary statistics by decade are given in Table T1.
Examining the coefficients, it appears that the effect of trade on all three determinants of
volatility rises over time. Each coefficient roughly doubles in magnitude between the 1970s
and the 1990s, with the 1980s somewhere in between. When it comes to summary statistics,
there is a clear decrease in aggregate volatility in our sample. The other variables, σ2 , ρ,
and h, do not change significantly across the three decades.
The results are summarized in Table 9. Not surprisingly, the rising β,s in our regressions
over time imply that the estimated impact of trade openness increases substantially. In the
1970s and 1980s, increasing trade openness from the 25th to the 75th percentile (roughly
from 40 to 80 percent of total output) increases aggregate volatility by 0.0009. In the 1990s,
the same increase in trade openness raises aggregate volatility by 0.0019, more than double
the absolute impact. As a share of aggregate volatility, the effect goes from less than 10%
of the average in the 1970s to almost 28% in the 1990s.
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