Diversi cation through Trade

A widely held view is that openness to international trade leads to higher GDP volatility, as trade increases specialization and hence exposure to sector-speci\u85c shocks. We revisit the common wisdom and argue that when country-wide shocks are impor-tant, openness to international trade can lower GDP volatility by reducing exposure to domestic shocks and allowing countries to diversify the sources of demand and supply across countries. Using a quantitative model of trade, we assess the importance of the two mechanisms (sectoral specialization and cross-country diversi\u85cation) and provide a new answer to the question of whether and how international trade a¤ects economic volatility. For helpful comments and conversations, we would like to thank Costas Arkolakis, Fernando Broner, Arie