Research

This paper uses U.S. credit register data and the 2018–2019 Trade War to study the effects of uncertainty on domestic credit supply. Exploiting differences in banks’ ex-ante exposure to trade uncertainty, we find that increased uncertainty is associated with a broad lending contraction across their customer firms. Banks display wait-and-see behaviour: more exposed banks curtail risky exposures, reduce loan maturities, and adjust loan supply along both intensive and extensive margins. The contraction is larger for capital-constrained banks and has real effects, particularly for bank-dependent firms.

This paper quantifies the impact of recent U.S. migration policy on the aggregate economy and state-level outcomes using a general equilibrium trade model with heterogeneous firms and imperfect substitution between natives and immigrants. The analysis incorporates data on migration by legal status, skill composition, trade flows, and firm heterogeneity. Repatriating undocumented immigrants reduces U.S. GDP by 5.46% and natives' welfare by 2.46%, while repatriating temporary visa holders results in declines of 1.50% and 0.66%, respectively. Regional effects vary, reflecting differences in states' immigrant-to-population shares. Modelimplied welfare losses from repatriating undocumented immigrants are almost twice that of recent tariff increases. JEL Classifications : F12, F15, F22, F24.

This paper studies how firms adjust input sourcing in response to climate policy. Using the EU Emissions Trading System (ETS) as a natural experiment and French productlevel import and production data, we show that firms increasingly shifted imports of ETS-regulated inputs to non-EU countries over the 2010s as the policy became more stringent, indicating carbon leakage. This leakage is economically significant: the share of ETS-regulated products sourced from outside the EU rose by 4.3 percentage points after the ETS was implemented. Motivated by these empirical findings, we estimate a heterogeneous firm model using pre-ETS data. Simulating the model under a e100 carbon tax reproduces observed leakage, raises domestic prices and modestly reduces French emissions. Adding a carbon tariff similar to the EU's Carbon Border Adjustment Mechanism (CBAM) reverses the leakage but further increases prices. The combined ETS+CBAM regime is seven times more effective than the ETS alone in reducing emissions. JEL Classifications : F14, F18, F64, H23, Q56.

We analyze the effects of ETS policy shocks on global stock market returns at the country-industry level using linear and spatial autoregression models. Results indicate that markets respond negatively to rising carbon prices, but the impact is modest. Spillovers are largely confined to sectors linked to EU industries through intermediate goods trade. There is no evidence of broader effects. Thus, the effects of ETS on stock returns appear limited in both magnitude and geographic scope.

We develop a multisector New Keynesian model to analyze the macroeconomic effects of carbon taxes, and show that they generate an inflation-output tradeoff whose size depends on the relative price flexibility of the sectors most affected (directly or indirectly) by the tax. When calibrated to U.S. input-output data and sectoral heterogeneity in emissions and price stickiness, the model matches empirical responses of price indices to an energy shock. A $100/metric ton CO2 tax substantially increases inflation if accommodated; curtailing this increase requires a prolonged contraction. Propagation via production linkages plays a key role. JEL Classifications : E12, E31, E52, Q54.

This paper presents a multi-country, multi-sector New Keynesian model to examine the drivers of global inflation during the pandemic and recovery periods. Shocks propagate through international trade and production networks, leading to global demand-supply imbalances. Production complementarities generate widespread sectoral cost-push inflation despite heterogeneous labour supply shocks. Flexible exchange rate regimes absorb cross-country monetary policy differences, curbing global demand reallocation and the inflationary spillovers relative to fixed-rate regimes.

We propose a novel indicator to capture pressures that arise at the global supply chain level, the Global Supply Chain Pressure Index (GSCPI). The GSCPI provides a new monitoring tool to gauge global supply chain conditions. We assess the index’s capacity to explain inflation outcomes, using the local projection method. Our analysis shows that recent inflationary pressures are closely related to the behavior of the GSCPI, especially at the level of producer price inflation in the United States and the euro area.

This paper examines the macroeconomic effects of public procurement. We exploit novel data to show that procurement eases firms borrowing constraints and has persistent effects on firm growth. Using a macroeconomic model with heterogeneous firms, asset- and earnings-based borrowing frictions, and government purchasing, we simulate revenue-neutral reforms that increase the share of small firms in procurement. We find that, despite helping financially constrained firms grow, these policies lead to non-trivial unintended negative effects. On net, the policies lead to a modest decline in GDP. The findings highlight how procurement design influences aggregate outcomes through firm-level financial frictions and reallocation dynamics. JEL Classifications : E22; E23; E62; G32.

This paper uses a dataset covering the universe of French firm-level value-added, imports, and exports and a quantitative multicountry heterogeneous firm model to study the propagation of foreign shocks to the domestic economy. Foreign shocks are transmitted primarily through large firms as they are the most likely to trade internationally. At the micro level, the majority of the GDP impact of foreign shocks is accounted for by the “foreign granular residual,” a statistic capturing larger firms’ greater responsiveness to foreign shocks. At the macro level, firm heterogeneity attenuates the GDP impact of foreign shocks relative to a homogeneous firm counterfactual.

This paper uses cross-country firm-level data to explore the impact of U.S. monetary policy shocks on firms' sales, investment, and employment. We estimate a significant impact of U.S. monetary policy on the average foreign firm, while controlling for other macroeconomic and financial variables like the VIX and exchange rate fluctuations that accompany U.S. monetary policy changes. We then estimate the role of international trade exposure and financial constraints in transmitting monetary policy shocks to firms, allowing for a better identification of the importance of external demand effects and the financial channel. We first exploit cross-countrysector-level data on intermediate and final goods to show that greater global production linkages amplify the impact of U.S. monetary policy at the firm level. We then show that the impact varies along the firm-level distribution of proxies for firms' financial constraints (e.g., size and net worth), with the impact being significantly attenuated for less constrained firms.

We study the transmission of the Global Financial Cycle (GFC) to domestic credit conditions in Turkey over 2003–13. An easing in global financial conditions leads to lower borrowing costs and an increase in local lending, with banks more exposed to international capital markets transmitting the GFC locally. The fall in local currency borrowing costs is larger than that in foreign currency, owing to the co-movement of the uncovered interest rate parity premium with the GFC. Collateral constraints do not relax during the boom phase.

We quantify the role of global production linkages in explaining spillovers of U.S. monetary policy shocks on country-sector stock returns, using a structural spatial autoregression model consistent with open-economy production network theory. Network effects from global supply chains account for around 70 percent of the total impact, and a counterfactual removing global production linkages reduces the total influence of U.S. monetary policy shocks by about half.

This paper was accepted to the AER under the guidance of Mark Aguiar, Coeditor. We would like to thank anonymous referees, Jean Imbs, Silvana Tenreyro, and workshop participants at several institutions for helpful discussions, and Eda Gulsen for expert research assistance. Di Giovanni gratefully acknowledges the European Research Council (ERC) under the European Union's Horizon 2020 research and innovation programme (grant agreement no. 726168), and the Spanish Ministry of Economy and Competitiveness, through the Severo Ochoa Programme for Centres of Excellence in R&D (SEV-2015-0563) for financial support. Mejean gratefully acknowledges support from a public grant overseen by the French National Research Agency (ANR) as part of the "Investissements d'Avenir" program (Idex grant agreement ANR-11-IDEX-0003- 02/Labex ECODEC ANR-11-LABEX-0047 and Equipex reference: ANR-10-EQPX-17, Centre d'accès sécurisé aux données (CASD)), and the European Research Council (ERC) under the European Union's Horizon 2020 research and innovation programme (grant agreement no. 714597). The authors declare that they have no relevant or material financial interests that relate to the research described in this paper. † Go to https://doi.org/10.1257/aer.20160091 to visit the article page for additional materials and author disclosure statement(s). 83 di Giovanni et al.: Micro oriGins of international coMoveMentvol. 108 no. 1 intensity of transmission of shocks, but rather is simply a stand-in for the prevalence of common shocks. The second is that even if one accepts the transmission of shocks interpretation of the Frankel-Rose result, the coarse nature of the cross-country setting makes it difficult to learn about the micro underpinnings of the trade-comovement relationship.

We examine the role of the international credit channel in Turkey over 2005–2013. We show that larger, more capitalized banks with higher non-core liabilities increase credit supply when capital inflows are higher. This result is stronger for domestic banks relative to foreign banks and survives during the crisis period of post-2008, when foreign banks in general stop lending in emerging markets and retreat to their home countries. By decomposing capital inflows into bank and non-bank flows, we show the importance of domestic banks' external borrowing for domestic credit growth. © 2017 Elsevier B.V. All rights reserved.

This paper revisits the relationship between relative prices, income changes, and expenditure switching during a balance of payments crisis. We exploit a unique item-level dataset to demonstrate that income-induced expenditure switching is needed to understand the data, and that a model with nonhomothetic preferences better matches the observed expenditure switching than a constant elasticity of substitution (CES) model, which is typically used in international macroeconomics. We focus on the 2008–2009 balance of payment crisis in Latvia, during which the country defied the conventional policy prescription and maintained its exchange rate pegged to the euro.1 To the surprise of many economists, within two years from the outset of the crisis, a 20 percent net trade-to-gross domestic product (GDP) deficit was reduced to balanced trade and GDP growth resumed (see Figure 1). The bulk of the external adjustment took place on the import side, as the share of imports in GDP declined from 65 percent in 2007 to 45 percent in 2009. 2 The adjustment in aggregate relative prices was subdued, as Latvia's real exchange rate remained broadly unchanged over the period 2008–2011.3 Latvia's experience has generated recent interest because it is one of the few examples where a large external adjustment was achieved faster than expected and without a nominal devaluation or a significant adjustment in relative prices, thus potentially shedding light on a successful adjustment process in a monetary union, and particularly in the southern periphery countries of the eurozone who also faced an appreciated real exchange rate and price rigidity. This paper zooms in to the microeconomic level to better understand what drove the adjustment in imports.

This paper evaluates the global welfare impact of observed levels of migration using a quantitative multi-sector model of the world economy calibrated to aggregate and firm-level data. Our framework features cross-country labor productivity differences, international trade, remittances, and a heterogeneous workforce. We compare welfare under the observed levels of migration to a no-migration counterfactual. In the long run, natives in countries that received a lot of migration— such as Canada or Australia—are better off due to greater product variety available in consumption and as intermediate inputs. In the short run, the impact of migration on average welfare in these countries is close to zero, while the skilled and unskilled natives tend to experience welfare changes of opposite signs. The remaining natives in countries with large emigration flows—such as Jamaica or El Salvador—are also better off due to migration, but for a different reason: remittances. The welfare impact of observed levels of migration is substantial, at about 5% to 10% for the main receiving countries and about 10% in countries with large incoming remittances. (JEL: F12, F15, F22, F24).

This paper uses a data base covering the universe of French firms for the period 1990–2007 to provide a forensic account of the role of individual firms in generating aggregate fluctuations. We set up a simple multisector model of heterogeneous firms selling to multiple markets to motivate a theoretically founded decomposition of firms' annual sales growth rate into different components. We find that the firm-specific component contributes substantially to aggregate sales volatility, mattering about as much as the components capturing shocks that are common across firms within a sector or country. We then decompose the firm-specific component to provide evidence on two mechanisms that generate aggregate fluctuations from microeconomic shocks highlighted in the recent literature: (i) when the firm size distribution is fat-tailed, idiosyncratic shocks to large firms directly contribute to aggregate fluctuations, and (ii) aggregate fluctuations can arise from idiosyncratic shocks due to input–output linkages across the economy. Firm linkages are approximately three times as important as the direct effect of firm shocks in driving aggregate fluctuations.

This paper evaluates the global welfare impact of China's trade integration and technological change in a multi-country quantitative Ricardian-Heckscher-Ohlin model. We simulate two alternative growth scenarios: a "balanced" one in which China's productivity grows at the same rate in each sector, and an "unbalanced" one in which China's comparative disadvantage sectors catch up disproportionately faster to the world productivity frontier. Contrary to a well-known conjecture (Samuelson 2004), the large majority of countries experience significantly larger welfare gains when China's productivity growth is biased toward its comparative disadvantage sectors. This finding is driven by the inherently multilateral nature of world trade. (JEL F14, F43, 019, 033, 047, P24, P33) T he real value of Chinese exports has increased by a factor of 12 between 1990 and 2007, far outpacing the three-fold expansion of overall global trade during this period. Naturally, such rapid integration and growth leads to some anxiety. In developed countries, a common concern is that China's productivity growth will be biased toward sectors in which the developed world currently has a comparative advantage. In a two-country setting, a well-known theoretical result is that a country can experience welfare losses when its trading partner becomes more similar in relative technology (Hicks 1953; Dornbusch, Fischer, and Samuelson 1977; Samuelson 2004; Ju and Yang 2009). This paper explores, both qualitatively and quantitatively, the global welfare consequences of different productivity growth scenarios in China. Analytically, we show that in a multi-country world, third-country effects are a key determinant of how a country's sectoral productivity changes affect welfare of all trading partners.

Using a multi-country model of production and trade calibrated to the observed distribution of firm size, we show that the welfare impact of high entry costs is small. In the sample of the 50 largest economies in the world, a reduction in entry costs all the way to the U.S. level leads to an average increase in welfare of only 3.25%. In addition, when the firm size distribution follows Zipf's Law, the welfare impact of the extensive margin of trade – newly imported goods at or near the exporting cutoff – is negligible. The extensive margin of imports accounts for only about 5.2% of the total gains from a 10% reduction in trade barriers in our model. This is because under Zipf's Law, the large, infra-marginal firms have a far greater welfare impact than the much smaller firms that comprise the extensive margin in these policy experiments. The distribution of firm size matters for these results: in a counterfactual model economy that does not exhibit Zipf's Law the gains from a reduction in fixed entry barriers are an order of magnitude larger, while the gains from a reduction in variable trade costs are an order of magnitude smaller. © 2012 Elsevier B.V. All rights reserved.

This paper proposes a new mechanism by which country size and international trade affect macroeconomic volatility. We study a model with heterogeneous firms that are subject to idiosyncratic firm-specific shocks, calibrated to data for the 50 largest economies in the world. When the firm size distribution follows a power law with an exponent close to minus one, idiosyncratic shocks to large firms have an impact on aggregate volatility. Smaller countries have fewer firms and, thus, higher volatility. Trade opening makes the large firms more important, thus raising macroeconomic volatility. Trade can increase aggregate volatility by 15 –20 percent in some small open economies.

Using a simple theoretical framework, we show that international trade systematically affects the distribution of firm size: the power law exponent among exporting firms should be strictly lower in absolute value than the power law exponent among non-exporting firms. We use a dataset of French firms to demonstrate that this prediction is strongly supported by the data, both for the economy as a whole and at the industry level. Furthermore, the differences between power law coef ficients for exporters and non-exporters are larger in sectors that are more open to trade. While estimates of power law exponents have been used to pin down parameters in theoretical and quantitative models, our analysis implies that the existing estimates are systematically lower than the true values. We propose two simple ways of estimating power law parameters that take explicit account of exporting behavior. © 2011 Elsevier B.V. All rights reserved.

This paper examines the mechanisms underlying this relationship using a large cross-country, industry-level panel dataset of manufacturing production and trade. We show that sector pairs that experience more bilateral trade exhibit stronger comove ment. Vertical linkages in production are an important explanation behind this effect: bilateral international trade increases comovement significantly more in cross-border industry pairs that use each other as intermediate inputs. Our estimates imply that these vertical pro duction linkages account for some 30 percent of the total impact of bilateral trade on the business cycle correlation. (JEL E32, F14, F43) Contents Putting the Parts Together: Trade, Vertical Linkages, and Business Cycle Comovement† 95 I. Empirical Strategy and Data 98 A. Sector-Level and Aggregate Comovement 98 B. Vertical Linkages and Transmission of Shocks 100 C. Identification and Interpretation 101 D. Data and Summary Statistics 104 II. Results 109 III. The Impact of Sector-Level Trade on Aggregate Comovement 115 IV . Conclusion 122 References 123 96 AMEriCAn ECOnOMiC JOurnAL: MACrOECOnOMiCs APriL 2010 transmission of shocks, it is instead driven by omitted variables: common shocks that happen to be stronger for countries that trade more with each other (Jean Imbs 2004). This question is especially important because standard international business cycle models of transmission have difficulty in matching the empirical results, leading to a "trade-comovement puzzle'' (M. Ayhan Kose and Yi 2006).

We present instrumental variables estimates of the impact of interest rates on quarterly real output for several European countries, using German interest rates as the instrument. These estimates confirm a strong forward-looking bias in least squares estimates that persists even conditional on standard controls for the history of the system. Due to the potential for correlation of output shocks across countries, we interpret our estimates as lower bounds for the effect of monetary policy on real output.

This paper examines the mechanisms through which output volatility is related to trade openness using an industry-level panel data set of manufacturing production and trade. The main results are threefold. First, sectors more open to international trade are more volatile. Second, trade is accompanied by increased specialization. These two forces imply increased aggregate volatility. Third, sectors that are more open to trade are less correlated with the rest of the economy, an effect that acts to reduce overall volatility. The point estimates indicate that each of the three effects has an appreciable impact on aggregate volatility. Added together they imply that the relationship between trade openness and overall volatility is positive and economically significant.

This paper explores the connection between interest rates in major industrial countries and annual real output growth in other countries. The results show that high foreign interest rates have a contractionary effect on annual real GDP growth in the domestic economy, but that this effect is centered on countries with fixed exchange rates. The paper then examines the potential channels through which major-country interest rates affect other economies. The effect of foreign interest rates on domestic interest rates is the most likely channel when compared with other possibilities, such as a trade effect. © 2007 Elsevier B.V . All rights reserved.

This paper examines the impact of trade costs on real exchange rate volatility. The relationship is examined by constructing a two-country Ricardian model of trade, based on the work of Dornbusch, Fischer, and Samuelson (1977), which shows that higher trade costs result in a larger nontradables sector, in turn leading to higher real exchange rate volatility. We then construct a remoteness index to proxy for trade costs, and provide empirical evidence supporting the channel. [JEL F30, F40] I nternational trade has grown at a startling pace over the past two decades. This growth can be explained by many factors, such as the lowering of trade costs, improved technology, and reduced trade barriers. This globalization also affects the macroeconomy. As Obstfeld and Rogoff (2001) show, small trade costs can have large effects on many macroeconomic phenomena. There has also recently been an open debate on the contribution of geography and institutions to economic growth (see Gallup, Sachs, and Mellinger, 1998; and Acemoglu, Johnson, and Robinson, 2001) because geographical barriers naturally lead to higher transport costs. Furthermore, another branch of the economic growth literature has shown that macroeconomic volatility tends to have a negative impact on growth.1 These different literatures point to potentially strong linkages between trade costs and the macroeconomy. Yet there is still little rigorous work that examines *Claudio Bravo-Ortega is an Assistant Professor of Economics at the Universidad de Chile; Julian di Giovanni is an Economist in the Research Department of the IMF.

This study uses the gravity model framework to uncover the determinants of the size and direction of international M&A flows. That simple empirical framework has been commonly used in the trade literature and more recently in the asset trade literature. Generally, gross bilateral capital flow data are rare, but I am able to fill this void through the use of a new comprehensive data set of world M&A flows covering the period 1990 – 1999. According to the data set used in this study, the value of deals announced has increased almost sevenfold over the decade, while the value of the deals going into effect during that period has increased 10-fold. One can see in Table 1 that the growth in announced M&A deals has not been restricted just to developed country-pairs. They have also proliferated between developing countries, and between developed and developing countries. I estimate the importance of several macroeconomic, financial and institutional variables in explaining these cross-border M&A flows. The main hypothesis I test in this paper is whether deep financial markets in the acquisition countries are positively associated with cross-border M&As. It is not immediately apparent that this effect should be large for M&A activity, once other more ‘traditional' variables that may affect FDI are considered. Therefore, I control for the importance of economic size, distance, information (proxied by telephone calls), a common language, the exchange rate, tax rates in the target country, tax treaties, trade agreements, goods trade, and wage differentials. I also explore the impact of financial market structure in the acquiring country, and the differences between ‘Developed-Developed' and ‘Developed-Developing' M&A flows.

We follow our previous work and use the framework developed in Baqaee and Farhi (2022) in order to quantify the impact of different shocks on inflation. Importantly, unlike in our previous quantification exercises, we now feed aggregate demand shocks into the model that vary depending on whether the fiscal impulse is included or not. Doing so allows us to quantify the impact of aggregate demand in driving inflation and run a counterfactual scenario that omits observed government spending as part of the aggregate demand shock. This second scenario allows us to gauge the importance of the fiscal package's impact on inflation. Our baseline results show that over the December 2019–June 2022 period, aggregate demand shocks explained roughly two-thirds of total model-based inflation in the United States, and that the fiscal stimulus contributed half or more of the total aggregate demand effect. The range for the impact of fiscal stimulus varies depending on how we detrend the data in constructing the empirical shock series. Since the fiscal packages came in a discrete fashion as bursts of government spending, such sensitivity is expected. Section I presents a brief description of the model. Section II describes the data and methodology we use to construct the shocks that we feed into the model. Section III presents the main results. I. Model We build on previous work (di Giovanni et al. 2022) to quantify the sources of inflation using a multisector macro-network model in the spirit of Baqaee and Farhi (2022).

We study the impact of the Covid-19 pandemic on Euro Area inflation and how it compares to the experiences of other countries, such as the United States, over the two-year period 2020-21. Our model-based calibration exercises deliver four key results: 1) Compositional effects – the switch from services to goods consumption – are amplified through global input-output linkages, affecting both trade and inflation. 2) Inflation can be higher under sector-specific labor shortages relative to a scenario with no such supply shocks. 3) Foreign shocks and global supply chain bottlenecks played an outsized role relative to domestic aggregate demand shocks in explaining Euro Area inflation over 2020-21. 4) International trade did not respond to changes in GDP as strongly as it did during the 2008-09 crisis despite strong demand for goods. These lower trade elasticities in part reflect supply chain bottlenecks. These four results imply that policies aimed at stimulating aggregate demand would not have produced as high an inflation as the one observed in the data without the negative sectoral supply shocks. ∗Prepared for the European Central Bank Forum on Central Banking, 2022.

This paper studies the welfare implications of IIES. More specifically, we quantify the reduction in welfare costs of a given external sector rebalancing that IIES provides. To do so, we employ the demand system framework of Hallak (2006), which motivates our previous work and was estimated in Bems and di Giovanni ( 2016). We calibrate a shock to aggregate expenditures that replicates the fall in imports observed in the data, and study its welfare implications under both homothetic and non-homothetic preferences. As an alternative approach to gauge the importance of the IIES channel, we also perform a historical decomposition of the fall in imports, which allows us to compare the contribution of IIES to that of a conventional price-induced expenditure switching. We find that IIES reduces the welfare costs of the external rebalancing by between 12–17 percent. In line with the existing literature, the historical decomposition shows that income compression was the main driver of the fall in imports, accounting for 68 percent of their decline. At the same time, the contribution of IIES (18 percent) was sizable and somewhat larger than that of conventional expenditure switching (14 percent). MAY 2018 548 AEA PAPERS AND PROCEEDINGS The remainder of the paper presents a sketch of our theoretical framework, briefly describes the data and parameter values, and then explains the setup and results of the welfare calculations and historical decompositions. I. Theoretical Framework Given nominal income and item prices, a representative consumer solves an expenditure allocation problem. The consumer's utility is defined over G product groups with the familiar CES aggregator: (1) C = ( ∑ g ω g 1 _ ρ c g ρ−1 _ ρ ) ρ _ ρ−1 .

We show that directly connected firms account for a substantial share of the aggregate comovement between France and its partners. Severing direct trade and multinational linkages with the typical country would lower France's correlation with it by about 0.10. This result is due to the fact that larger firms tend to exhibit more trade and multinational linkages to foreign countries, and thus firms that are directly connected to foreign countries account for a large share of French aggregate output. This paper further investigates the role of large firms in international business cycle comovement by focusing on the top 100 largest firms in our data, echoing Gabaix's definition of the granular residual. The main finding is that a substantial share of the overall impact of direct linkages on comovement can be traced back to just 100 firms. In the remainder of the paper, we establish that the top 100 firms (i) are important in aggregate; (ii) exhibit stronger international linkages than the rest of the economy; and (iii) contribute substantially to aggregate comovement. Recent years have seen a significant improvement in our understanding of the micro origins of aggregate fluctuations. An influential strand of the literature argues that the observed firm size distribution is so fat-tailed that shocks to large firms can lead to aggregate fluctuations, dubbed "granular" ( Gabaix 2011; Carvalho and Grassi 2015) . Gabaix ( 2011) measures the contribution of large firms to aggregate fluctuations by constructing a composite shock to the top 100 firms in the United States—referred to as the granular residual—and shows that this shock can indeed have an impact on US GDP growth.

This paper develops a measure of the riskiness of a country's pattern of export specialization, and illustrates its features across countries and over time. The exercise reveals large cross-country differences in the risk content of exports . This measure is strongly correlated with the volatility of terms-of-trade, total exports, and output, but does not exhibit a close relationship to the level of income, overall trade openness, or other country characteristics. We then propose an explanation for what determines the risk content of exports, based on the theoretical literature exemplified by Turnovsky (1974). Countries with a comparative advantage in safe sectors or a strong enough comparative advantage in risky sectors will specialize, whereas countries whose comparative advantage in risky sectors is not too strong will diversify their export structure to insure against export income risk. We use both non-parametric and semiparametric techniques to demonstrate that these theoretical predictions are strongly supported by the data. JEL Classifications : F15, F40.