Does A Regional Trade Agreement Lessen or Exacerbate Growth Volatility? An Empirical Investigation

This paper assesses how regional trade agreements (RTAs) impact growth volatility on aworldwide sample of 170 countries with data spanning the period 1978-2012.Notwithstanding concerns that trade openness through RTAs can heighten exposure toshocks, in particular when it leads to increased product specialization, RTAs throughenhanced policy credibility, improved policy coordination, and reduced risk of conflictscan ease growth volatility. Empirical estimations suggest the benefits outweigh the costsas RTAs are consistently associated with lower growth volatility, after controlling fortrade openness and other determinants of growth volatility. Furthermore, regressionresults also suggest that countries that are more prone to shocks are more likely to join aRTA, in particular with countries with relatively less volatile growth, additionallyenhancing the stabilization effect.