Output Volatility and Openness to Trade: A Reassessment

By Eduardo A. Cavallo. 2009

117 citations recorded by the source corpus.

This paper presents new empirical evidencesuggesting that the net effect of trade openness on output volatility is stabilizing. The methodology employed seeks to correct for the likely endogeneity of trade in this setting using gravity estimates as instrumental variables. The results confirm that exposure to trade raises output volatility through the terms-of-trade channel, as previously documented in the literature, but also shows that this is counteracted by a quantitatively larger stabilizing effect. Additional evidence is presented showing that the latter effect comes (at least in part) through the financial channel. Splitting the sample into countries that are more exposed to capital flows and countries that are less exposed, the paper shows that the stabilizing effect of commercial trade predominates in the first sub-sample.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/798f919b8dc45c08adf1566956284bacf4171cbb

Citations in the corpus

• Surfing the Waves of Globalization: Asia and Financial Globalization in the Context of the Trilemma (2010, unknown): “For the volatility reducing effect of trade openness, refer to Calvo et al. (2004), Cavallo (2005, 2007), and Cavallo and Frankel (2004).”
• Assessing the Emerging Global Financial Architecture: Measuring the Trilemma's Configurations over Time (2008, unknown): “For the volatility reducing effect of trade openness, refer to Calvo et al. (2004), Cavallo (2005, 2007), and Cavallo and Frankel (2004).”
• Financial Globalization and Economic Policies (2009, unknown): “Alfaro, Chanda, Kalemli-Ozcan, and Sayek (2004), Carkovic and Levine (2005), and Durham (2004) also find that the growth”