Evaluating Growth Volatility Susceptibility within Regional Free Trade Agreements

Abstract

This paper looks at the effects on trading partners that are included and not included in a Regional Free Trade Agreement (RFTA). Using the system GMM methodology, we consider six control variables to determine whether the volatility is more pronounced in non-RFTA countries (Type 1) or countries that are RFTA trading partners (Type 2). The results are three-fold: 1. whether a country is in an agreement or not there is statistically significant volatility spillover from trading partner economies, 2. being in a RFTA does not insulate oneself from non-RFTA countries, and 3. participating in a RFTA actually increases susceptibility to volatility from other RFTA countries. We conclude that it may be more harmful to be in a RFTA because of the increase in volatility exposure among trading partners relative to not joining a RFTA.

Keywords: Volatility, Development, GMM, RFTA

JEL Classification: O11, O16, O18, O19