The volatility of world trade in the 21st century: Whose fault is it anyway?

Abstract

AbstractThis paper explores the drivers of the volatility of international trade. It decomposes trade growth into six components that have gained attention in the literature and studies their contribution to overall volatility. It yields three main findings. First, trade volatility in the 1990–2015 period is mostly explained by a common factor, changes in the gravity‐related characteristics of a country's trading partners and country‐specific factors. Product composition and the identity of trading partners appear to be less important in explaining volatility. Second, the pre‐2009 decline in volatility and the post‐2009 increase in volatility appear to be driven by different factors. The former is mostly explained by a decline in the variance of country‐specific factors; the latter appears to be driven by an increase in the volatility of common factors. Third, diversification is a likely force behind the steady decline in the volatility stemming from country‐specific factors, especially in developing countries.