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Journal of Economic Integration 2006 June;21(2) :254-272.
Trade Openness, Economic Size, and Macroeconomic Volatility: Theory and Empirical Evidence

Georgios Karras 

University of Illinois at Chicago
Copyright ©2006 Journal of Economic Integration

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 Classifications: E32, F41

Keywords: Openness | Macroeconomic Volatility | Investment | Consumption
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