Risk Shifting and Excessive International Trade Volatility

The recent global crisis saw a sharp decline in output, but the accompanying decline in international trade volumes was twice as big. But, in the 1990s boom international trade volume increase much more than output levels. Why is international trade so volatile? The paper develops a parsimonious general-equilibrium model which features a riskshifting bias in the country resource allocation towards exports, generating excess volatility of the export sector relative to economic activity level. Data on the risk content of exports, and creditor rights indicators, for developed, emerging and developing economies, over the period of 1978-2004, is used to analyze the relationship between the export sector riskiness, creditor rights and financial openness. Using fixed effects reduced-form regressions; we show that countries with poorer creditor rights, or those which are financially open, are the ones with a higher risk content of exports.