A new CEPR working paper by Professor Miguel Leon-Ledesma, collaborating with Adina Ardelean, and Laura Puzzello, studies how the structure of international trade affects macroeconomic volatility.
This CEPR working paper Growth Volatility and Trade: Market Diversification vs. Production Specialization by Miguel Leon-Ledesma, Adina Ardelean (University of Santa Clara), and Laura Puzzello (Monash University) studies how the structure of international trade affects macroeconomic volatility.
‘The traditional view is that trade, by increasing specialisation in certain sectors, can increase fragility because of exposure to sectoral shocks. What this paper shows is that what matters is the nature of shocks affecting the economy and how it interacts with trade structure. By trade structure we mean how diversified your sales are geographically and which sectors you specialise in. What we show is that trade, by increasing diversification, can substantially reduce volatility for highly volatile countries. Most of these volatility reduction gains come from diversifying away from the home market. Also, contrary to the traditional view, specialisation can actually reduce volatility. These results show that international trade has a large potential to reduce macroeconomic volatility.’