The link between trade openness, export diversification, institutions and output volatility in transition countries. (running title: Output volatility and trade openness revisited: the role of export diversification and institutions in transition countries).

Abstract

This paper investigates the role of trade openness, export diversification and institutions as potential predictors of output volatility in 25 transition economies in the period 1996–2010. Our results suggest that diversification may not attenuate the output volatility effects of openness for transition countries already at medium or higher levels of diversification, but nonetheless may have this effect at lower levels of diversification. Further, while inflation volatility and conflict both increase output volatility, better political institutions contribute to output stability in transition countries. In addition, we find that differences between diversification at the export margins are not just conceptual, but also substantive: the effect of openness is conditional on export diversification at the intensive margin but not at the extensive margin. These findings are robust to different assumptions regarding the potential endogeneity of openness and institutional quality as well as to alternative proxies for institutions and output volatility and additional control variables.