Volatility of industrial output, demand fluctuations, and international trade
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Output volatility of an industry has been shown to affect substantially the welfare of its firms, consumers, and workers and to contribute to the aggregate output volatility. While country and industry factors have been considered as sources of volatility at the industry level, the uncertainty related to demand in destination markets has been neglected. Using a panel of manufacturing and trade data, this paper fills this gap in the literature by deriving and estimating the components of output volatility due to producer country-, industry- and demand-specific shocks, as well as their interaction. Our estimates suggest that industrial output volatility is a country’s rather than an industry’s characteristic and that demand shocks in destination markets are the main determinants of output volatility at the industry level. In addition, this paper examines the effect of trade openness on output and demand volatility. We find that industries more open to trade are more volatile because intra-industry imports make domestic demand and production more uncertain. We also find evidence suggesting that exports reduce demand volatility through their diversification effect.
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