Diversification Through Trade

68 Pages Posted: 31 Aug 2015

See all articles by Francesco Caselli

Francesco Caselli

London School of Economics & Political Science (LSE) - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Miklós Koren

Central European University (CEU)

Milan Lisicky

European Union - European Commission

Silvana Tenreyro

London School of Economics (LSE)

Multiple version iconThere are 2 versions of this paper

Date Written: August 2015

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.

Suggested Citation

Caselli, Francesco and Koren, Miklós and Lisicky, Milan and Tenreyro, Silvana, Diversification Through Trade (August 2015). NBER Working Paper No. w21498. Available at SSRN: https://ssrn.com/abstract=2653509

Francesco Caselli (Contact Author)

London School of Economics & Political Science (LSE) - Department of Economics ( email )

Houghton Street
London WC2A 2AE
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Miklós Koren

Central European University (CEU) ( email )

Nador utca 9
Budapest, H-1051
Hungary

Milan Lisicky

European Union - European Commission ( email )

Rue de la Loi 200
Brussels, B-1049
Belgium

Silvana Tenreyro

London School of Economics (LSE) ( email )

Houghton Street
London WC2A 2AE
United Kingdom

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