Estimates 3 key effects of trade on macroeconomic volatility and finds trade openness increases volatility.

1. Trade Openness
& Volatility
Julian di Giovanni & Andrei A Levchenko, 2009. "Trade Openness and Volatility,"The
Review of Economics and Statistics, MIT Press, vol. 91(3), pages 558-585, 01
(Selected Slides)
Presented by:
Thomas Camp
Ridwan Karim 1
Asher Zafar

2. Why do we care about volatility?
• Standard deviation of GDP per capita a standard
measure of macroeconomic volatility
• Macroeconomic volatility has effects on
welfare, inequality and poverty
• Trade openness is one of the determinants of
macroeconomic volatility
• Correlation between trade openness and
volatility is positive in the data
2

3. Trade openness and GDP growth volatility
3

4. How does trade effect volatility?
• No consensus on the mechanisms through which
trade openness affects volatility
• Industry-level panel data set on production and
trade employed in this paper for
• 61 countries
• 28 manufacturing sectors
• Time period 1970-1999
4

5. Effects of trade on volatility
1. Sector-level volatility:
• Trade openness is positively associated with changes
in the volatility of individual sectors.
2. Comovement:
• Trade openness is negatively associated with
correlation between sectors within a countries
economy, reducing volatility
3. Specialization:
• Trade openness leads to greater specialization, and
greater volatility.
5

6. Change in Aggregate Volatility
25th percentile  75th percentile of trade openness
Sector-Level
Volatility
13.5%
6.2%
Comovement
17.3%
6
Specialization
10.2%

7. Country and time effects
• Country-specific effects: Developing countries
experience an increase in volatility five times
higher than developed countries for the same
increase in trade openness
• Time varying effects: the impact of the same
trade opening on aggregate volatility in the
1990s is double what it was in the 1970s.
7

8. Results
•
8

9. Specialization and Trade Openness
9

10. Back to aggregate volatility…
•
10

11. Partial effects of each channel on aggregate volatility
• How do you expect these effects to vary for developing
nations? Over time?
•
Sector Volatility Effect
Aggregate
Comovement Effect
Volatility
Specialization Effect 11

12. Estimating partial effects
•
Sector “Other sector”
Comovement Specialization
Volatility volatility
12

13. Change in aggregate volatility
25th  75th percentile of trade openness
Sector Aggregate
Comovement Specialization
Volatility volatility
• “Trade openness increased by about 30 percentage 13
points over the period, going from below 60% in the
1970s to almost 90% in the 1990s”

14. Volatility effects for varying
country characteristics
Sector Aggregate
Comovement Specialization
Volatility volatility
• “The impact of the same trade opening is likely to be five times 14
higher in absolute terms for a typical developing country compared
with a typical developed country”

15. Volatility effects by decade
1970s 1980s 1990s
• Greater trade is amplifying the impact of these effects 15
on aggregate volatility over time