Trade Openness Reduces Volatility When Countries Are Well Diversied

This paper addresses the mechanisms by which trade openness affects growth volatility. Using a diverse set of export diversification indicators, it presents strong evidence pointing to an important role for export diversification in reducing the ef...

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Bibliographic Details
Main Authors:	Haddad, Mona E., Lim, Jamus Jerome, Saborowski, Christian
Format:	Policy Research Working Paper
Language:	English
Published:	2012
Subjects:	AGGREGATE LEVEL AMERICAN ECONOMIC REVIEW APPLIED RESEARCH AVERAGE GROWTH AVERAGE GROWTH RATE AVERAGE LEVEL BANKING CRISIS BARRIERS TO ENTRY BOND BUSINESS CYCLE CAPITA GROWTH CAPITAL FLOW CAPITAL FLOWS CIVIL LIBERTIES CLOSED ECONOMIES COMMODITY COMMODITY PRICE COMPETITIVE ADVANTAGE COMPLEMENTARITIES COMPLEMENTARITY CROSS-BORDER TRANSACTIONS DEPENDENT VARIABLE DESCRIPTIVE STATISTICS DEVELOPED WORLD DEVELOPING COUNTRIES DEVELOPING ECONOMIES DEVELOPING WORLD DEVELOPMENT ECONOMICS DOMESTIC MARKET DOMESTIC PRODUCERS DYNAMIC PANEL ECONOMIC ACTIVITY ECONOMIC CRISIS ECONOMIC DEVELOPMENT ECONOMIC FLUCTUATIONS ECONOMIC GROWTH ECONOMIC MANAGEMENT ECONOMIC POLICY ECONOMIC REFORM ECONOMIC STUDIES ECONOMICS LETTERS EFFECTS OF VOLATILITY EMPIRICAL LITERATURE EMPIRICAL MODEL EMPLOYMENT EQUATIONS ERROR TERM ESTIMATION RESULTS EXCHANGE RATE REGIMES EXPENDITURE EXPENDITURES EXPLANATORY VARIABLES EXPORT BASE EXPORT DIVERSIFICATION EXPORT GROWTH EXPORT INCENTIVES EXPORT PROMOTION EXPORTERS EXPORTS EXPOSURE EXTERNAL SHOCKS EXTERNALITIES FINANCIAL CRISES FINANCIAL CRISIS FINANCIAL MARKETS FINANCIAL TRANSACTIONS FIXED EFFECTS FIXED EFFECTS ESTIMATOR FLUCTUATIONS FOREIGN INVESTMENT GLOBAL ECONOMY GLOBAL INTEGRATION GLOBAL SHOCKS GLOBAL TRADE GLOBALIZATION GOVERNMENT SPENDING GROWTH EFFECT GROWTH EFFECTS GROWTH PROCESS GROWTH RATE GROWTH RATES GROWTH VOLATILITY HIGH GROWTH HIGH INCOME HIGH INCOME COUNTRIES HIGHER VOLATILITY HUMAN CAPITAL IMPACT OF TRADE INCOME GROWTH INDEPENDENT VARIABLES INDUSTRIAL POLICY INDUSTRIALIZED COUNTRIES INDUSTRIALIZED WORLD INFLATION INFLATION VOLATILITY INSTRUMENTAL VARIABLE ESTIMATION INSURANCE INTERACTION TERM INTERACTION TERMS INTEREST RATES INTERNATIONAL COMPETITION INTERNATIONAL MARKETS INTERNATIONAL MONETARY FUND INTERNATIONAL TRADE JOINT VENTURES KNOWLEDGE SPILLOVERS LAGGED DEPENDENT LIBERALIZATION LINK BETWEEN VOLATILITY LONG RUN LOW INCOME LOW INCOME COUNTRIES LOW-INCOME ECONOMIES MACROECONOMIC FLUCTUATIONS MACROECONOMIC VOLATILITY MACROECONOMICS MARKET DIVERSIFICATION MARKET ENTRY MEASURES OF VOLATILITY MIDDLE INCOME MIDDLE-INCOME ECONOMIES NATURAL DISASTER NATURAL DISASTERS NATURAL RESOURCE NEGATIVE SIGN NEW MARKETS NEW PRODUCTS OPEN ECONOMIES OPEN ECONOMY OUTPUT OUTPUT GROWTH OUTPUT VOLATILITY PATTERN OF TRADE PER CAPITA GROWTH POINT ESTIMATES POLICY ANALYSIS POLICY IMPLICATIONS POLICY MAKERS POLICY MEASURES POLICY RESEARCH POLICY VARIABLES POLITICAL ECONOMY PORTFOLIO POVERTY REDUCTION PRICE UNCERTAINTY PRODUCT MARKET PROPERTY RIGHTS PUBLIC OFFICIALS RATE OF GROWTH REAL EFFECTIVE EXCHANGE RATE REAL INTEREST RATES RED TAPE RELATIVE IMPORTANCE REVIEW OF ECONOMICS RISK SHARING SERIAL CORRELATION SIGNIFICANT IMPACT SMALL ECONOMIES SPECIALIZATION STANDARD DEVIATION STANDARD ERRORS STARTUP STRUCTURAL CHARACTERISTICS SUBSTITUTE SYSTEMIC BANKING CRISES TAX TAX INCENTIVES TERMS OF TRADE TRADE COSTS TRADE FACILITATION TRADE INTEGRATION TRADE LIBERALIZATION TRADE OPENNESS TRADE POLICY TRADE REFORM TRADE SHOCKS TRADE VOLUMES VOLATILITY MEASURE VOLATILITY MEASURES WORLD ECONOMY WORLD TRADE WORLD TRADE ORGANIZATION
Online Access:	http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20100226112948 http://hdl.handle.net/10986/3709

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Summary:	This paper addresses the mechanisms by which trade openness affects growth volatility. Using a diverse set of export diversification indicators, it presents strong evidence pointing to an important role for export diversification in reducing the effect of trade openness on growth volatility. The authors also identify positive thresholds for product diversification at which the effect of openness on volatility changes sign. The effect is shown to be positive only for a minority of countries with highly concentrated export baskets. This result is shown to be robust to both explicit accounting for endogeneity as well as the inclusion of a host of additional controls.

Trade Openness Reduces Volatility When Countries Are Well Diversied

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