Also worth noting is how the relative importance of the three effects changes over time.
In the cross-sectional exercise using 30-year averages, we found that the Specialization and
the Sector Volatility Effects are the two most important ones, while the Comovement Effect
is small in magnitude. It turns out that this pattern varies somewhat across decades, even
as all three effects become larger in magnitude over time. In the 1970s, the Sector Volatility
Effect is substantially greater than the other two, while the Specialization Effect is much
weaker than in the full sample. Furthermore, relative to the full sample, the Comovement
Effect is more important in the 1970s as well. Intriguingly, in the 1980s all three effects
are more or less equal in absolute value, and only in the 1990s do we see the Comovement
Effect falling substantially behind the other two.
The result that the impact of trade has become stronger over time is distinct from the
simple observation that trade has increased over the period. The increase in trade itself
need not imply that the relationship between trade and volatility would have strengthened.
Perhaps more interestingly, this finding is not at all inconsistent with the fall in overall
macroeconomic volatility over this period. What seems to be happening is that while
aggregate volatility has decreased, differences between the volatilities of country-sectors are
better explained by the variation in trade openness. These quantitative results are valuable
in their own right as they reveal the changing nature of trade’s impact on the macroeconomy
over time. Furthermore, they provide a rich set of facts to build upon in future empirical
and theoretical work aiming to better understand the nature of the global business cycle.
For example, in the macroeconomics literature sector-level dynamics underlying aggregate
business cycles have been explored in a closed economy,23 and recent work has moved to the
firm level.24 Our results can help provide a foundation for future work in the open economy
setting.
5 Conclusion
Whether increased trade openness has contributed to rising uncertainty and exposed coun-
tries to external shocks remains a much debated topic. In this paper, we use industry-level
data to document several aspects of the relationship between openness and volatility. Our
main conclusions can be summarized as follows. First, higher trade in a sector raises its
volatility. Second, more trade also implies that the sector is less correlated with the rest of
the economy. Third, higher overall trade openness increases specialization in the economy.
The sum of these effects implies that moving from the 25th to the 75th percentile in the dis-
23For an early contribution see Long and Plosser (1983).
24See Gabaix (2005) and references within.
20