GDP Growth Volatility and Regional Free Trade Agreements

This research explores the consequences of entering into a regional free trade agreement on a country's level of volatility in real per capita GDP growth. It incorporates 97 countries and 2404 observations. It also employs a system GMM, dynamic panel methodology to control for business cycle effects and endogenous RHS variables. At the least, this study finds that regional free trade agreements will not increase volatility in most cases, and may actually lower it. In only one out of the seven agreements explored is volatility larger after the implementation of the agreement. Furthermore, the role that domestic and foreign variables play in enhancing the agreements' effect on volatility is critical for determining whether the agreement will beneficial. What is shown is that not all agreements are equal in outcomes, but that they can at least provide a medium through which volatility can be lowered.