Trade Liberalization And Output Volatility

Abstract

There is an abundant literature in support of trade liberalization and economic growth. In last few decades we have seen increase in trade liberalization, however the vulnerability of countries prone to global crisis and have also enhanced. Country specific evidence suggests that due to trade integration financial crisis of 2008 have immensely impacted the demand growth with rise in unemployment rate. Mexico, India and South Africa also experience the decline in their output due to global crisis in 2007-08. Both countries have been following liberal economic policies for last one decade with a result of increased economic growth and foreign direct investment. Financial crisis of 2007-08 has impacted with intensity severely contracting GDP growth with increase in unemployment, poverty and inequality. The Objective of this paper is to determine the impact of trade liberalization on economic output volatility. The relationship is analyzed through OLS regression analysis. Auto Regressive Distributive Lag (ARDL) method is used to develop the econometric model. This is a time series analysis of 47 years of data from 1970 to 2017. Standard deviation in
World’s GDP is used as proxy for economic volatility which is considered as a dependent variable. Independent variables are world trade openness, foreign direct investment and broad money as % of world gdp. World trade (import and exports) as % of total gdp has
been used as a proxy for trade openness, FDI is used to measure the capital flows and broad money M2 is used as a measure of financial deepening . The result indicates that there is a positive relationship among trade liberalization and output volatility. Capital Inflows reacts negatively whereas broad money increases the risk of economic volatility. The results are in consistent with the studies of ( Kaminsky and Reinhart 1999), and (Glick and Hutchison, 1999).