Trade openness and volatility

Abstract

The objective of this presentation is to test whether trade openness leads to economic volatility, keeping other relevant things constant. This theme has been investigated in various studies, as we shall show in the literature review. However this particular study place the analysis within the vulnerability/ resilience framework, proposed by Briguglio et al. (2009). One would expect that if a country depends highly on economic conditions in other countries, its economic situation will also be highly exposed to external shocks, possibly leading to GDP growth volatility in the country in question. Likewise, a high dependence on imports is likely to lead to a high degree of exposure to economic conditions in the rest of the world. There are other reasons why trade openness leads to GDP growth volatility - these will be discussed in the section on the literature on this matter. The hypothesis to be tested in this paper is that GDP growth volatility depends on trade openness, on economic governance and on political governance of a given economy, the latter variable possibly proxying GDP per capita (the stage of development) and social governance in the country concerned. The approach used to test this relationship is the regression method, using panel data.