Diversi cation through Trade

Transcription

1 Diversi cation through Trade Francesco Caselli, Miklos Koren, Milan Lisicky, and Silvana Tenreyro Very preliminary May 2010 Caselli et al. (Very preliminary) Diversi cation through Trade May / 39

2 Three developments in the World economy 1 Substantial decline in output volatility Caselli et al. (Very preliminary) Diversi cation through Trade May / 39

3 Three developments in the World economy 1 Substantial decline in output volatility in developed countries Caselli et al. (Very preliminary) Diversi cation through Trade May / 39

4 Three developments in the World economy 1 Substantial decline in output volatility in developed countries in majority of developing countries Caselli et al. (Very preliminary) Diversi cation through Trade May / 39

5 Three developments in the World economy 1 Substantial decline in output volatility in developed countries in majority of developing countries 2 Large and widespread increase in trade openness Caselli et al. (Very preliminary) Diversi cation through Trade May / 39

6 Three developments in the World economy 1 Substantial decline in output volatility in developed countries in majority of developing countries 2 Large and widespread increase in trade openness emergence of new trading partners (e.g. China and India) Caselli et al. (Very preliminary) Diversi cation through Trade May / 39

7 Three developments in the World economy 1 Substantial decline in output volatility in developed countries in majority of developing countries 2 Large and widespread increase in trade openness emergence of new trading partners (e.g. China and India) 3 Fast transmission of the current crisis, with the near collapse of trade Caselli et al. (Very preliminary) Diversi cation through Trade May / 39

8 The established view Openness to trade)specialization)increases volatility. Caselli et al. (Very preliminary) Diversi cation through Trade May / 39

9 The established view Openness to trade)specialization)increases volatility. Implicit assumption: sector-speci c shocks are the prevalent source of volatility. Caselli et al. (Very preliminary) Diversi cation through Trade May / 39

10 The established view Openness to trade)specialization)increases volatility. Implicit assumption: sector-speci c shocks are the prevalent source of volatility. But in volatility accounting, country-speci c shocks (a ecting all sectors) account for a large part of overall volatility. Caselli et al. (Very preliminary) Diversi cation through Trade May / 39

11 The established view Openness to trade)specialization)increases volatility. Implicit assumption: sector-speci c shocks are the prevalent source of volatility. But in volatility accounting, country-speci c shocks (a ecting all sectors) account for a large part of overall volatility. Openness to trade may lead to sectoral specialization, but it may also help diversify country-speci c shocks (both on the demand and supply sides). Caselli et al. (Very preliminary) Diversi cation through Trade May / 39

12 An intuition for a link Increased trade openness brings about a larger pool of potential suppliers of inputs, and thus the potential for diversi cation of cost shocks. Caselli et al. (Very preliminary) Diversi cation through Trade May / 39

13 An intuition for a link Increased trade openness brings about a larger pool of potential suppliers of inputs, and thus the potential for diversi cation of cost shocks. the larger the pool of suppliers, the lower the impact of shocks a ecting particular suppliers. Caselli et al. (Very preliminary) Diversi cation through Trade May / 39

14 An intuition for a link Increased trade openness brings about a larger pool of potential suppliers of inputs, and thus the potential for diversi cation of cost shocks. the larger the pool of suppliers, the lower the impact of shocks a ecting particular suppliers. through GE, mitigation of supply shocks may also lead to more stable global demands. Caselli et al. (Very preliminary) Diversi cation through Trade May / 39

15 An intuition for a link Increased trade openness brings about a larger pool of potential suppliers of inputs, and thus the potential for diversi cation of cost shocks. the larger the pool of suppliers, the lower the impact of shocks a ecting particular suppliers. through GE, mitigation of supply shocks may also lead to more stable global demands. Increased trade openness also means that a large shock to a particular country (e.g. US), can have a larger impact on other countries through stronger demand linkages. Caselli et al. (Very preliminary) Diversi cation through Trade May / 39

16 An intuition for a link Increased trade openness brings about a larger pool of potential suppliers of inputs, and thus the potential for diversi cation of cost shocks. the larger the pool of suppliers, the lower the impact of shocks a ecting particular suppliers. through GE, mitigation of supply shocks may also lead to more stable global demands. Increased trade openness also means that a large shock to a particular country (e.g. US), can have a larger impact on other countries through stronger demand linkages. Trade can mitigate the shock s impact on the GDP of the country hit by the shock. Caselli et al. (Very preliminary) Diversi cation through Trade May / 39

17 Outline Conceptual Framework Caselli et al. (Very preliminary) Diversi cation through Trade May / 39

18 Outline Conceptual Framework Eaton-Kortum-Alvarez-Lucas s Ricardian model of trade Caselli et al. (Very preliminary) Diversi cation through Trade May / 39

19 Outline Conceptual Framework Eaton-Kortum-Alvarez-Lucas s Ricardian model of trade Add aggregate country-speci c shocks. Caselli et al. (Very preliminary) Diversi cation through Trade May / 39

20 Outline Conceptual Framework Eaton-Kortum-Alvarez-Lucas s Ricardian model of trade Add aggregate country-speci c shocks. Some simple qualitative experiments Caselli et al. (Very preliminary) Diversi cation through Trade May / 39

21 Outline Conceptual Framework Eaton-Kortum-Alvarez-Lucas s Ricardian model of trade Add aggregate country-speci c shocks. Some simple qualitative experiments Global decline in trade barriers Caselli et al. (Very preliminary) Diversi cation through Trade May / 39

22 Outline Conceptual Framework Eaton-Kortum-Alvarez-Lucas s Ricardian model of trade Add aggregate country-speci c shocks. Some simple qualitative experiments Global decline in trade barriers China joins the World Caselli et al. (Very preliminary) Diversi cation through Trade May / 39

23 Outline Conceptual Framework Eaton-Kortum-Alvarez-Lucas s Ricardian model of trade Add aggregate country-speci c shocks. Some simple qualitative experiments Global decline in trade barriers China joins the World Big crisis hits large country Caselli et al. (Very preliminary) Diversi cation through Trade May / 39

24 Outline Conceptual Framework Eaton-Kortum-Alvarez-Lucas s Ricardian model of trade Add aggregate country-speci c shocks. Some simple qualitative experiments Global decline in trade barriers China joins the World Big crisis hits large country Next step: A quantitative exercise Caselli et al. (Very preliminary) Diversi cation through Trade May / 39

25 Outline Conceptual Framework Eaton-Kortum-Alvarez-Lucas s Ricardian model of trade Add aggregate country-speci c shocks. Some simple qualitative experiments Global decline in trade barriers China joins the World Big crisis hits large country Next step: A quantitative exercise How have actual changes in trade barriers a ected volatility patterns across countries? China? Crisis? Caselli et al. (Very preliminary) Diversi cation through Trade May / 39

26 Conceptual framework Eaton-Kortum-Alvarez-Lucas s Ricardian model of trade Caselli et al. (Very preliminary) Diversi cation through Trade May / 39

27 Conceptual framework Eaton-Kortum-Alvarez-Lucas s Ricardian model of trade N countries with immobile nonproduced equipped labour and produced goods (used as intermediates and for direct consumption). Caselli et al. (Very preliminary) Diversi cation through Trade May / 39

28 Conceptual framework Eaton-Kortum-Alvarez-Lucas s Ricardian model of trade N countries with immobile nonproduced equipped labour and produced goods (used as intermediates and for direct consumption). E ciency varies across countries and goods; modeled as random variables drawn from a (known) distribution. Caselli et al. (Very preliminary) Diversi cation through Trade May / 39

29 Conceptual framework Eaton-Kortum-Alvarez-Lucas s Ricardian model of trade N countries with immobile nonproduced equipped labour and produced goods (used as intermediates and for direct consumption). E ciency varies across countries and goods; modeled as random variables drawn from a (known) distribution. Constant returns to scale and perfect competition. Caselli et al. (Very preliminary) Diversi cation through Trade May / 39

30 Conceptual framework Eaton-Kortum-Alvarez-Lucas s Ricardian model of trade N countries with immobile nonproduced equipped labour and produced goods (used as intermediates and for direct consumption). E ciency varies across countries and goods; modeled as random variables drawn from a (known) distribution. Constant returns to scale and perfect competition. Output for a given country is deterministic; there is no aggregate volatility Caselli et al. (Very preliminary) Diversi cation through Trade May / 39

31 Conceptual framework Eaton-Kortum-Alvarez-Lucas s Ricardian model of trade N countries with immobile nonproduced equipped labour and produced goods (used as intermediates and for direct consumption). E ciency varies across countries and goods; modeled as random variables drawn from a (known) distribution. Constant returns to scale and perfect competition. Output for a given country is deterministic; there is no aggregate volatility Add country-speci c shocks, which shift the distribution of e ciencies in a country Caselli et al. (Very preliminary) Diversi cation through Trade May / 39

32 Conceptual framework Eaton-Kortum-Alvarez-Lucas s Ricardian model of trade N countries with immobile nonproduced equipped labour and produced goods (used as intermediates and for direct consumption). E ciency varies across countries and goods; modeled as random variables drawn from a (known) distribution. Constant returns to scale and perfect competition. Output for a given country is deterministic; there is no aggregate volatility Add country-speci c shocks, which shift the distribution of e ciencies in a country Output in a country becomes stochastic. Caselli et al. (Very preliminary) Diversi cation through Trade May / 39

33 Productive structure EK-AL L q q(x) q* q*(x) Caselli et al. (Very preliminary) Diversi cation through Trade May / 39

34 Autarky Buyers purchase individual goods q(x) to maximize the CES: Z η q = q(x) η 1 η 1 η φ(x)dx φ is the density of goods with technology x. 0 Caselli et al. (Very preliminary) Diversi cation through Trade May / 39

35 Autarky Buyers purchase individual goods q(x) to maximize the CES: Z η q = q(x) η 1 η 1 η φ(x)dx φ is the density of goods with technology x. Technology for q(x) (per unit of L) is Cobb-Douglas: 0 q(x) = x θ q m (x) 1 β Caselli et al. (Very preliminary) Diversi cation through Trade May / 39

36 Autarky Buyers purchase individual goods q(x) to maximize the CES: Z η q = q(x) η 1 η 1 η φ(x)dx φ is the density of goods with technology x. Technology for q(x) (per unit of L) is Cobb-Douglas: 0 q(x) = x θ q m (x) 1 i) draws x are common to all producers; ii) CRS!p=mc; iii) x exp(λ) β Caselli et al. (Very preliminary) Diversi cation through Trade May / 39

37 Autarky Buyers purchase individual goods q(x) to maximize the CES: Z η q = q(x) η 1 η 1 η φ(x)dx φ is the density of goods with technology x. Technology for q(x) (per unit of L) is Cobb-Douglas: 0 q(x) = x θ q m (x) 1 i) draws x are common to all producers; ii) CRS!p=mc; iii) x exp(λ) Price of bundle p = Z λ p(x) 1 0 β 1 η e λx 1 η dx Caselli et al. (Very preliminary) Diversi cation through Trade May / 39

38 Autarky Buyers purchase individual goods q(x) to maximize the CES: Z η q = q(x) η 1 η 1 η φ(x)dx φ is the density of goods with technology x. Technology for q(x) (per unit of L) is Cobb-Douglas: 0 q(x) = x θ q m (x) 1 i) draws x are common to all producers; ii) CRS!p=mc; iii) x exp(λ) Price of bundle p = Price of individual goods Z λ p(x) 1 0 p(x) = Bx θ w β p 1 β 1 η e λx 1 η dx β Caselli et al. (Very preliminary) Diversi cation through Trade May / 39

39 Multi-country open economy q(x) can be traded internationally. Caselli et al. (Very preliminary) Diversi cation through Trade May / 39

40 Multi-country open economy q(x) can be traded internationally. φ(x) = φ(x 1,..., x N ) is the joint density of goods that have productivity draws x = (x 1,..., x N ) across N countries. Caselli et al. (Very preliminary) Diversi cation through Trade May / 39

41 Multi-country open economy q(x) can be traded internationally. φ(x) = φ(x 1,..., x N ) is the joint density of goods that have productivity draws x = (x 1,..., x N ) across N countries. Draws independent across countries. Caselli et al. (Very preliminary) Diversi cation through Trade May / 39

42 Multi-country open economy q(x) can be traded internationally. φ(x) = φ(x 1,..., x N ) is the joint density of goods that have productivity draws x = (x 1,..., x N ) across N countries. Draws independent across countries. Delivering a tradable good from country j to country i results in 0 < κ ij 1 arriving at j (= if i = j); κ ij κ ik κ kj ri, k, j Caselli et al. (Very preliminary) Diversi cation through Trade May / 39

43 Production The total output for use as input or consumption in country i. Z q i = R N + η q i (x) η 1 η 1 η φ(x)dx Caselli et al. (Very preliminary) Diversi cation through Trade May / 39

44 Production The total output for use as input or consumption in country i. Z q i = R N + η q i (x) η 1 η 1 η φ(x)dx Price p i = AB N j=1 w β j p j 1 κ ij! 1/θ β λ j 1 A θ Caselli et al. (Very preliminary) Diversi cation through Trade May / 39

45 Simple Version of the Model: Summary N! w 1 p i (w) = AB β 1/θ θ j p j (w ) 1 β κ ij λ j j=1 2 d ij (w) = (AB) 1/θ w β 1/θ j p j (w ) 1 β λ p i (w )κ ij j ; d ij = 1 j=1 3 L i p i q i = N j=1 L j p j q j d ji (w) Y i = L i w i p i = real GDP Caselli et al. (Very preliminary) Diversi cation through Trade May / 39

46 Adding country-speci c shocks In EKAL, λ 0 js are deterministic, so GDP per capita is a deterministic constant for each country j. Assume now that λ 0 js are subject to shocks Higher realization of λ j leads to stochastically lower costs x in country j and higher GDP j Stochasticity in λ j imparts stochasticity in GDP j. Caselli et al. (Very preliminary) Diversi cation through Trade May / 39

47 Some Simple Analytical Results Caselli et al. (Very preliminary) Diversi cation through Trade May / 39

48 Level and volatility of GDP in Autarky GDP: Y i = (AB) 1/β Z i Z i λ θ/β i i L i Caselli et al. (Very preliminary) Diversi cation through Trade May / 39

49 Level and volatility of GDP in Autarky GDP: Y i = (AB) 1/β Z i Z i λ θ/β i i L i Volatility ˆx ln x t Var(Ŷ i ) = Var(Ẑ i ) Caselli et al. (Very preliminary) Diversi cation through Trade May / 39

50 Level and volatility of GDP in costless trade GDP Y i = (AB) 1/β Z β β+θ i N j=1 Z! β θ/β θ+β j Caselli et al. (Very preliminary) Diversi cation through Trade May / 39

51 Level and volatility of GDP in costless trade GDP Volatility: Y i = (AB) 1/β Z 8 >< Var(Ŷ i ) = >: β β+θ i β+θγi β+θ h θ β+θ i 2 N 2θ β+θγ i (β+θ) 2 N j=1 Z! β θ/β θ+β j 2 Var(Ẑi )+ j6=i γ 2 j Var(Ẑ j )+ N γ j Cov(Ẑ j, Ẑ i ) j6=i 9 >= >; γ j = Z j β θ+β N j=1 Z j β θ+β Caselli et al. (Very preliminary) Diversi cation through Trade May / 39

52 Costless trade versus autarky Productivity gain: Y T i Y A i = Z β β+θ i N j=1 Z! β θ/β θ+β j Z i = " 1 + Z β β+θ i N j6=i Z β θ+β j # θ/β > 1 Caselli et al. (Very preliminary) Diversi cation through Trade May / 39

53 Costless trade versus autarky Productivity gain: Y T i Y A i = Z β β+θ i N j=1 Z! β θ/β θ+β j Z i = " 1 + Z β β+θ i N j6=i Z β θ+β j # θ/β > 1 Gain higher β β+θ β θ+β i) the smaller the country Zi Zj ii) the higher the importance of tradeables in production (1 iii) the higher the scope for comparative advantage θ. β), and Caselli et al. (Very preliminary) Diversi cation through Trade May / 39

54 Change in variance (costless trade versus autarky). If Var(Ẑ i ) = σ and Cov(Ẑ i ; Ẑ j ) = 0 Var(Ŷi T ) = σ ( β + θγi β + θ 2 + θ β + θ 2 N j6=i γ 2 j ) Caselli et al. (Very preliminary) Diversi cation through Trade May / 39

55 Change in variance (costless trade versus autarky). If Var(Ẑ i ) = σ and Cov(Ẑ i ; Ẑ j ) = 0 Var(Ŷi T ) = σ ( β + θγi β + θ 2 + θ β + θ 2 N j6=i γ 2 j ) Then Var(Ŷi A ) > Var(Ŷi T ) Caselli et al. (Very preliminary) Diversi cation through Trade May / 39

56 Change in variance (costless trade versus autarky). If Var(Ẑ i ) = σ and Cov(Ẑ i ; Ẑ j ) = 0 Var(Ŷi T ) = σ ( β + θγi β + θ 2 + θ β + θ 2 N j6=i γ 2 j ) Then Var(Ŷi A ) > Var(Ŷi T ) Decline in volatility is higher i) the smaller the country (lower γ i ) ii) the higher the share of tradeables in the economy Caselli et al. (Very preliminary) Diversi cation through Trade May / 39

57 Change in variance (costless trade versus autarky). If Var(Ẑ i ) = σ and Cov(Ẑ i ; Ẑ j ) = 0 Var(Ŷi T ) = σ ( β + θγi β + θ 2 + θ β + θ 2 N j6=i γ 2 j ) Then Var(Ŷi A ) > Var(Ŷi T ) Decline in volatility is higher i) the smaller the country (lower γ i ) ii) the higher the share of tradeables in the economy Results can be reversed if covariance are high and/or the volatility of other countries is high. Caselli et al. (Very preliminary) Diversi cation through Trade May / 39

58 Intermediate Levels of Trading Costs Caselli et al. (Very preliminary) Diversi cation through Trade May / 39

59 Qualitative exercise Each period, draw λ = (λ 1...λ N ) from a log-normal distribution with xed mean and std deviation Choose A,B,θ, α, β as in AL Time series, volatility and covariance: country/period T vol cov country 1 y 11 y 12 y y 1T σ y1 σ y1,w country 2 y 21 y 22 y y 2T σ y2 σ y2,w country n y N1 y N2 y N3... y NT σ yn σ yn,w for given κ Caselli et al. (Very preliminary) Diversi cation through Trade May / 39

60 Some simple (qualitative) experiments 1 Widespread decrease in international trade barriers 2 China joins the World 3 Crisis hits big country Caselli et al. (Very preliminary) Diversi cation through Trade May / 39

61 Calibration Barriers decrease L N = 1; κ ijt = κ t increases over time for i 6= j and κ iit = 1. Same, but L N = (1, 1, 1, 3, 3). China joins : Same, but L N = (1, 1, 1, 3, 3); and κ i5t = κ 5jt smaller at t = 1 Crisis hits : low λ for a big country; L N = (1, 1, 1, 3, 3). Caselli et al. (Very preliminary) Diversi cation through Trade May / 39

62 Uniform decrease in trade barriers 1 Baseline: log variance of output per capita 1.25 Baseline: covariance of output per capita with the world aggregate country 1 country 2 country country 4 country country 1 country 2 country 3 country 4 country κ κ Volatility change Covariance change L N = 1; κ ij increases uniformly over time from 0.5 to 0.9 (κ iit = 1) Caselli et al. (Very preliminary) Diversi cation through Trade May / 39

63 Uniform decrease in trade barriers, with some big countries 1 Baseline: log variance of output per capita 1.7 country 1 Baseline: covariance of output per capita with the world aggregate country 2 country country 4 country country 1 country 2 country 3 country 4 country κ κ κ ij increases uniformly over time from 0.5 to 0.9 L=(1,1,1,3,3) Caselli et al. (Very preliminary) Diversi cation through Trade May / 39

64 China joins the World 1 China: log variance of output per capita 1.4 China: covariance of output per capita with the world aggregate country country 2 country country country country 1 country 2 country 3 country 4 country κ κ κ ij increases uniformly but for a big country it increases more rapidly:1-4 = 0.75->0.9, for the 5th moves 0.4->0.9L=(1,1,1,3,3) Correlation among the old partners (say US-Europe) can actually decrease with the rise of China. Key what is de ned as world Caselli et al. (Very preliminary) Diversi cation through Trade May / 39

65 Shock to Big country Big Crisis: output per capita after a negative shock in λ % % country 1 3 country κ country κ L(1, 1, 1, 3, 3); shock to λ 4. Caselli et al. (Very preliminary) Diversi cation through Trade May / 39

66 Next Steps Use data on bilateral trade, gross output, GDP to back out the λs and κs. Study how much of the changes in volatility and comovement patterns can be accounted for by changes in κ, the process generating λ, the growth of China. Caselli et al. (Very preliminary) Diversi cation through Trade May / 39

67 Minimalist Counterfactual Spending on goods from j as a share of i 0 s spending: d ij = I ij L i p i q i = I ij GNO i S i Spending share on domestic goods: d ii = 1 d ij j6=i Real aggregate GDP: w i L i p i = const L i θ/βi. λi d ii Caselli et al. (Very preliminary) Diversi cation through Trade May / 39

68 Minimalist Counterfactual (continued) Real aggregate GDP: w i L i p i = const L i θ/βi. λi d ii Call z it the combination L i andλ i z it can be recovered from: z it = ln L it + θ β i ln λ it. y it = const + z it We can then decompose GDP volatility as θ β i ln d ii,t, θ 2 Var(ỹ i ) = Var( z i ) + Var(ln d ii ) β i 2θ β i Cov( z i, ln d ii ). Caselli et al. (Very preliminary) Diversi cation through Trade May / 39

69 Change in Variance from to Country Percent Change in Standard Deviation (1) Absolute Difference in Variance (2) Absolute Difference in Var(Z) (3) Absolute Difference in Var(dii) (4) Absolute Difference in the Covariance (5) Percent Share of difference (2) accounted for by (4) and (5) Australia Austria Belgiumplus Canada China,P.R.: Mainland Denmark Finland Franceplus Germany Greece India Ireland Italy Japan Korea Mexico Netherlands Norway Portugal Spain Sweden United Kingdom United States Caselli et al. (Very preliminary) Diversi cation through Trade May / 39

70 Next Step: Towards a more quantitative model where d ii = 1 d ij = A 1/θ 2 6 p i = A 4 N j=1 0 B jw β j j p j 1 β j p i κ B jw β j j p j 1 β j κ ij L i p i q i + S i = 1 A 1 A 1/θ 1/θ λ j λ j (1) θ (2) N L j p j q j d ji (3) j=1 L i w i = β i (L i p i q i + S i ) (4) d ij = d ij ; Big Unknowns: L j ; λ j ; κ ij j6=i I ij L i p i q i. (5) Caselli et al. (Very preliminary) Diversi cation through Trade May / 39

71 Next: Back to the experiments How much can the (presumable) increase in κs account for the observed changes in volatility and comovements? Or was it good luck improvements in the distribution of λ? Or was it the rise of China (increase in L)? What if, with this structure in place, the US s λ gets a bad draw? Caselli et al. (Very preliminary) Diversi cation through Trade May / 39

72 Calibration I S i = E ci c M ic c β i = L i w i L i p i q i + S i = GDP i GNO i Caselli et al. (Very preliminary) Diversi cation through Trade May / 39

73 Calibration II Backing out the κ ji. From d ij = A 1/θ B jw β j j p j 1 β j p i κ ij 1 A 1/θ λ j And assuming κ ji = κ ji κ ji = dij d θ/2 ji d jj d ii Caselli et al. (Very preliminary) Diversi cation through Trade May / 39

74 Calibration II Backing out λ i L β i /θ From i =Z β i /θ i λ i L β i /θ i β/θ d ii = A 1/θ wi λ j p i = d ii (AB i ) 1/θ wi L i p i βi /θ Caselli et al. (Very preliminary) Diversi cation through Trade May / 39

75 Some Very Preliminary Results from Counterfactuals Caselli et al. (Very preliminary) Diversi cation through Trade May / 39

76 E ect of Openness if Shocks had been as in w ith correlation w ithout correlation USA GBR AUT BEL DNK FRA GER ITA NLD NOR SWE CAN JPN FIN GRC IRL PRT ESP AUS COL MEX IND KOR CH2 ROW actual κ and shocks from Caselli et al. (Very preliminary) Diversi cation through Trade May / 39

77 E ect of Openness if Shocks had been as in post w ith correlation w ithout correlation USA GBR AUT BEL DNK FRA GER ITA NLD NOR SWE CAN JPN FIN GRC IRL PRT ESP AUS COL MEX IND KOR CH2 ROW actual κ and shocks from Caselli et al. (Very preliminary) Diversi cation through Trade May / 39

78 Some Conclusions When country-speci c shocks are imperfectly correlated, trade can lead to lower volatility, particularly when i) a country is small ii) the share of tradeables in the economy is big iii) trading partners are less volatile or the correlations are small. Caselli et al. (Very preliminary) Diversi cation through Trade May / 39

79 Some Conclusions When country-speci c shocks are imperfectly correlated, trade can lead to lower volatility, particularly when i) a country is small ii) the share of tradeables in the economy is big iii) trading partners are less volatile or the correlations are small. The introduction of new trading partners: i) increases the correlation of growth rates with the new partners ii) can decrease bilateral correlations among members of the old group (US-Europe) Caselli et al. (Very preliminary) Diversi cation through Trade May / 39

80 Some More Tentative Conclusions Trade seems to have contributed to lower volatility in the majority of countries analyzed For the US, if the process of shocks had been the same as in the , openness would have contributed to lower volatility. But it appears that the process of shocks in the US became signi cantly less volatile post 84; thus, openness exposed it to the shocks of its more volatile partners. A very tentative conclusion is that in the US trade actually contributed to higher volatility. Caselli et al. (Very preliminary) Diversi cation through Trade May / 39