Growth volatility and trade: market diversification vs. production specialization

Adina Ardelean, Miguel León-Ledesma, Laura Puzzello

Research output: Contribution to journalArticleResearchpeer-review

Abstract

We analyze how trade affects aggregate volatility using a multi-country, multi-industry, and multi-destination framework. We decompose aggregate output growth risk into destination risk, origin risk, and idiosyncratic risk (and their covariances). We then use this framework to run counterfactuals changing the degree of destination-market diversification (including home) and industry specialization. Using data on 19 industrial sectors, 34 countries, and 84 destination markets for the 1980–2011 period, we find that destination risk dominates, followed by idiosyncratic risk. From the counterfactuals, we find that the effect of increased destination-market diversification is quantitatively important in reducing aggregate volatility for high volatility countries. On the other hand, reducing specialization increases volatility.

Original languageEnglish
Pages (from-to)252-271
Number of pages20
JournalJournal of Economic Behavior and Organization
Volume225
DOIs
Publication statusPublished - Sept 2024

Keywords

  • Destination shocks
  • Origin shocks
  • Output volatility
  • Specialization
  • Trade diversification

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