Trade Openness, Economic Size, and Macroeconomic Volatility: Theory and Empirical Evidence

Abstract

JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org. Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at https://about.jstor.org/terms Center for Economic Integration, Sejong University is collaborating with JSTOR to digitize, preserve and extend access to Journal of Economic Integration This content downloaded from 152.118.24.31 on Tue, 24 Oct 2023 21:48:34 +00:000 0 0 0 0 0 0 0 0 0 0 0 All use subject to https://about.jstor.org/terms Abstract The effects of trade openness on macroeconomic volatility are theoretically ambiguous, so the issue must be resolved empirically. Most of the empirical evidence, however, has been mixed and inconclusive. This paper investigates the question using two data sets: one of 56 countries over 1951-1998, and another of 105 countries over 1960-1997. It is shown that, when their effects are jointly estimated, both economic size and trade openness have a sizable, negative, and generally statistically significant effect on the variability of output, consumption, investment, and the exchange rate. It is also found that depreciation rates are inversely related to both economic size and openness. These effects are robust across the two data sets and three different detrending methods. • JEL classification: E32, F41 •