Output Volatility, Composition of Trade, and Transmission of Economic Shocks Across Countries

Abstract

In this paper we investigate how supply and demand shocks in one country affect output volatility in other countries. While the evidence for cross-country transmission of demand shocks is mixed, we find that volatile supply in one country leads to larger imports and output volatility in other countries. As a result, the effect of trade openness on output volatility is highly heterogeneous across countries and depends on the composition of their trade. Those countries whose imports originate in economies with volatile supply experience a greater impact of trade on output volatility.

Keywords: trade structure, output volatility, transmission of shocks across countries

JEL Classification: F14, E32, F44, F62