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.
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