The influential work of Ramey and Ramey (1995) highlighted a relationship that has now come to be regarded as conventional wisdom—that output volatility and growth are negatively correlated. We reexamine this relationship in the context of globalization. Using a comprehensive new dataset, we document that, while the basic negative association between growth and volatility has been preserved during the 1990s, both trade and financial integration significantly weaken this negative relationship.

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In an economy with heterogeneous firms, in which tariffs determine the mass of active firms, free trade optimality depends positively on firm heterogeneity and negatively on transportation costs. Gains from protection depend on the level of backwardness: for a given mass of backward firms, they increase with their quality and decrease with the quality of advanced firms; for given production quality levels, the benefits of protection increase with the mass of backward firms.

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Economists believe that trade openness raises output volatility by exposing countries to terms-of-trade shocks. This view does not take into account that trade openness can also reduce financial-related volatility. The results reported here confirm that openness raises volatility through the terms-of-trade channel, but that this effect is counteracted by a quantitatively larger stabilizing one. Additional evidence shows that the stabilizing effect comes in part through the financial channel.

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By lifting trade barriers, domestic industries gain access to a less expensive supply of intermediate goods. On the other hand, trade forces domestic industries to face a tougher competition from firms abroad.I describe and measure how trade liberalization affects growth through these two potentially opposing channels. Using a panel of several countries and periods, both channels turn significant.While the first spurs growth the second hinders it.The first channel outweighs the second one.

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Plant turnover increases aggregate productivity when efficient producers are more likely to survive. Given high entry and exit rates and the potential importance of net entry in accounting for aggregate productivity, in this paper we examine the determinants of plant exits and then examine how exits and other forms of output reallocation contribute to aggregate productivity. Using a unique plant-level longitudinal dataset for Colombia for the period 1982-1998, we examine the role of productivity and demand as well as input costs in determining plant survival. Moreover, given the important market-oriented reforms in Colombia during the early 1990s, we explore whether and how plant survival changed in response to trade liberalization. Our data permit measurement of plant-level quantities and prices, which allow us to decompose productivity and demand shocks, and in turn to estimate the effects of these fundamentals on plant survival. We find that higher productivity, higher demand and lower input prices increase the probability of plant survival. We also find that trade liberalization increased plant exit, while other reforms decreased plant exit. Moreover, trade liberalization makes high demand more important in determining survival, possibly because non-exporting low demand plants were unlikely to be exposed to competition prior to trade opening. By contrast, other reforms increase the importance of physical efficiency in determining survival, possibly because improvements in financial intermediation and increased factor adjustments enable reallocation towards promising projects, making efficient plants more likely to remain in the market.

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