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Quarterly Journal of Economics Vol. 135 No. 1 2020

Diversification Through Trade*

Francesco Caselli1; Miklós Koren2; Milan Lisicky3; Silvana Tenreyro4

1 London School of Economics, Centre for Macroeconomics, Centre for Economic Policy Research · 2 Central European University, Közgazdaság- és Regionális Tudományi Kutatóközpont, CEPR · 3 European Commission · 4 London School of Economics, Bank of England, Centre for Macroeconomics, Centre for Economic Policy Research

open access

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.

DOI
10.1093/qje/qjz028
Volume
135
Issue
1
Pages
449-502
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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