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Diversification through Trade

Author

Listed:
  • Francesco Caselli

    (Economics Department London School of Economics (LSE)
    Centre for Macroeconomics (CFM))

  • Miklós Koren

    (Department of Economics Central European University
    Centre for Economic Policy Research (CEPR))

  • Milan Lisicky

    (European Comission)

  • Silvana Tenreyro

    (Economics Department London School of Economics (LSE)
    Centre for Macroeconomics (CFM))

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 quantative 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 how international trade affects economic volatility.

Suggested Citation

  • Francesco Caselli & Miklós Koren & Milan Lisicky & Silvana Tenreyro, 2015. "Diversification through Trade," Discussion Papers 1518, Centre for Macroeconomics (CFM).
    • Handle: RePEc:cfm:wpaper:1518
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    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles
    • F6 - International Economics - - Economic Impacts of Globalization
    • F62 - International Economics - - Economic Impacts of Globalization - - - Macroeconomic Impacts

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