Discussion Paper Details

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Title: Diversification through Trade

Author(s): Francesco Caselli, Miklůs Koren, Milan Lisicky and Silvana Tenreyro

Publication Date: August 2015

Keyword(s): diversification, trade and volatility

Programme Area(s): International Macroeconomics and Finance, International Trade and Regional Economics, Macroeconomics and Growth and Monetary Economics and Fluctuations

Abstract: A widely held view is that openness to international trade leads to higher GDP volatility, as trade increases specialization and hence exposure to sector-specific shocks. We revisit the common wisdom and argue that when country-wide shocks are important, openness to international trade can lower GDP volatility by reducing exposure to domestic shocks and allowing countries to diversify the sources of demand and supply across countries. Using a quantitative model of trade, we assess the importance of the two mechanisms (sectoral specialization and cross-country diversification) and provide a new answer to the question of whether and how international trade affects economic volatility.

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Bibliographic Reference

Caselli, F, Koren, M, Lisicky, M and Tenreyro, S. 2015. 'Diversification through Trade'. London, Centre for Economic Policy Research.