Trade Openness and Volatility



tribution of trade openness raises volatility of the aggregate manufacturing sector by about
19% of the average aggregate variance observed in our sample. The estimated impact dif-
fers a great deal between countries and over time however. Trade raises aggregate volatility
roughly five times more in a typical developing country than in a typical developed country.
Over time, the impact of trade acting through all three channels has become stronger.

While the results in this paper are informative, our understanding of the trade-volatility
relationship can be improved along many dimensions. For instance, the exercise in this paper
imposes symmetry between sectors, and thus does not allow us to investigate whether some
countries tend to specialize systematically in more or less risky sectors, something that could
be another channel for the relationship between trade and volatility. The change over time
in the impact of trade on volatility also deserves much more careful study. In particular,
the increasing impact of trade, together with growing trade itself, needs to be analyzed
jointly with the well-documented fact that business cycle volatility has actually decreased
over the same period. Finally, this paper remains silent on the relationship between trade
and growth. This relationship must also be considered if we wish to make any claims on
the welfare consequences of opening to trade. We consider these to be promising avenues
for future research.

References

Backus, David K., Patrick J. Kehoe, and Finn E. Kydland, “International Real Business
Cycles,”
Journal of Political Economy, August 1992, 100 (4), 745-75.

Barlevy, Gadi, “The Costs of Business Cycles Under Endogenous Growth,” American
Economic Review
, September 2004, 94 (4), 964-90.

Baxter, Marianne and Michael Kouparitsas, “Trade Structure, Industrial Structure and
International Business Cycles,” 2002. Federal Reserve Bank of Chicago Working Paper
No. 2002-30.

Beck, Thorsten, Asli Demirgiic-Kunt, and Ross Levine, “A New Database on Financial
Development and Structure,”
World Bank Economic Review, 2000, 14 (3), 597-605.

Bejan, Maria, “Trade Openness and Output Volatility,” October 2004. Mimeo, ITAM.

Bekaert, Geert, Campbell R. Harvey, and Christian Lundblad, “Growth Volatility and
Equity Market Liberalization,” June 2004. NBER Working Paper No. 10560.

Burstein, Ariel, Christopher Kurz, and Linda L. Tesar, “International Trade, Production
Sharing and the Transmission of Business Cycles?,” November 2004. Mimeo, UCLA
and the Univeristy of Michigan.

Cavallo, Eduardo A., “Openness to Trade and Output Volatility: A Reassessment,” 2005.
Mimeo, Harvard University.

Cecchetti, Stephen G., Alfonso Flores-Lagunes, and Stefan Krause, “Assessing the Sources
of Changes in the Volatility of Real Growth Use a mirror,” January 2006. NBER
Working Paper No. 11946.

21



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