Better Neighbors: Toward a Renewal of Economic Integration in Latin America by Chad P. Bown Daniel Lederman Samuel Pienknagura & Raymond Robertson

Author:Chad P. Bown, Daniel Lederman, Samuel Pienknagura & Raymond Robertson
Language: eng
Format: epub

a. The restrictions imposed on each set of fixed effects are arbitrary. For example, Koren and Tenreyro (2007) perform a similar empirical exercise to the one presented but impose a zero-sum restriction on the country-specific effect. The restrictions chosen in the empirical exercise in this book are more fitted for the questions that are at the heart of it.

b. This stems from the identity and the approximations

c. For more details on the exact calculation of each of these effects, see annex 2A.

The export growth variance equation provides a useful tool to address the question of how deeper regional integration in LAC affects the volatility of the region’s exports. However, before analyzing the answer to this question in more detail, it is useful to first understand the behavior of each of the components affecting trade volatility across countries in different regions.

A word of caution regarding the data used in the analysis by Bennett et al. (2016) is warranted. The results that follow use a sample of about 40 countries and 4 sectors for which there is non-zero trade in the 22 years between 1990 and 2011 for all exporter-importer-sector triads.32 Countries and years are chosen for data reliability reasons (see Berthelon and Freund 2008) and for the technical requirements assuring proper estimation of each of the effects in (2.1). Although the sample covers the bulk of global trade and a large share of each country’s trade flows, the country coverage amounts to only about 20 percent of all countries. In the case of LAC, the sample includes six countries—Argentina, Brazil, Chile, Colombia, Mexico, and Peru. Hence, the results regarding the impact of deeper regional integration in LAC on volatility are limited to these countries. Later in this section, additional suggestive evidence will be provided to assess the impact of deeper trade integration in LAC on the volatility of other countries in the region.

This caveat notwithstanding, figure 2.18 shows some of the factors highlighted in equation (2.1), through which changes in regional integration patterns (changes in the weights) can affect volatility. In particular, it shows by region the simple average of the variance of the exporter and importer effects as well as some of the (simple) average covariances that enter the term Cov in equation (2.1). In the case of covariances, it shows averages with regional and nonregional partners.

FIGURE 2.18 Variances and correlations of supply and demand effects, by region

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