Does a Regional Trade Agreement Lessen or Worsen Growth Volatility? An Empirical Investigation

31 Pages Posted: 5 Oct 2016

See all articles by Kangni Kpodar

Kangni Kpodar

International Monetary Fund (IMF)

Patrick A. Imam

International Monetary Fund (IMF)

Date Written: November 2016

Abstract

This paper assesses how regional trade agreements (RTAs) impact on growth volatility for a sample of 170 countries over the period 1978–2012. Notwithstanding concerns that trade openness through RTAs might heighten exposure to shocks, RTAs through enhanced policy credibility, improved policy coordination and reduced risk of conflicts can also ease growth volatility. Empirical estimations suggest the benefits outweigh the costs as RTAs are consistently associated with lower growth volatility. In addition, smaller economies benefit more from the reduced growth volatility associated with RTAs than larger ones. The nature of the RTA also matters as shallow agreements such as partial‐scope preferential trade agreements do not appear to have a significant effect on growth volatility, whereas free trade areas and customs unions do. Finally, in investigating the drivers of RTAs, the regression results confirm that countries that are more prone to shocks are more likely to join an RTA, in particular with countries with relatively less volatile growth.

Suggested Citation

Kpodar, Kangni and Imam, Patrick A., Does a Regional Trade Agreement Lessen or Worsen Growth Volatility? An Empirical Investigation (November 2016). Review of International Economics, Vol. 24, Issue 5, pp. 949-979, 2016, Available at SSRN: https://ssrn.com/abstract=2847982 or http://dx.doi.org/10.1111/roie.12243

Kangni Kpodar (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Patrick A. Imam

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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