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Diversification through trade

Caselli, Francesco, Koren, Miklos, Lisicky, Milan and Tenreyro, Silvana (2020) Diversification through trade. Quarterly Journal of Economics, 135 (1). 449 - 502. ISSN 0033-5533

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Identification Number: 10.1093/qje/qjz028

Abstract

A widely held view is that openness to international trade leads to higher income volatility, as trade increases specialization and hence exposure to sector-specific shocks. Contrary to this common wisdom, we argue that when country-wide shocks are important, openness to international trade can lower income 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 show that in recent decades international trade has reduced economic volatility for most countries.

Item Type: Article
Official URL: https://academic.oup.com/qje
Additional Information: © 2019 The Authors
Divisions: Economics
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HF Commerce
JEL classification: E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations; Cycles
F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics
Date Deposited: 13 Sep 2019 16:09
Last Modified: 27 Jun 2020 23:24
URI: http://eprints.lse.ac.uk/id/eprint/101615

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