An Empirical Analysis of the Impact of Manufacturing and Construction Growth Volatility on Trade Growth Volatility: The GARCH-X Model Approach

This study empirically analyzes the impact of real-sector growth—specifically in manufacturing and construction—on the volatility of South Korea’s export and import growth rates using the GARCH-X model. Based on monthly data from January 1998 to June 2025, the time series was constructed with the volatility of export and import growth rates as the dependent variable, and the growth rates of manufacturing and construction as exogenous variables. The results showed that manufacturing growth significantly increases the volatility of trade growth rates. In contrast, it turned out that construction growth alone tends to amplify volatility, but when considered alongside manufacturing growth, it serves as a stabilizing factor in trade volatility. Furthermore, asymmetry tests indicate that negative shocks in manufacturing and construction have a stronger effect on the volatility of export and import growth rates than positive shocks, suggesting that adverse developments in these sectors can intensify trade instability. Based on these findings, several policy implications are suggested. First, it is necessary to reduce overreliance on specific manufacturing sectors and promote diversification toward AI and environmentally friendly industries. Second, construction should be strategically fostered around trade infrastructure to contribute to trade stability. Third, institutional support such as tax benefits and investment subsidies is needed to revitalize capital investment and improve the business environment. Lastly, achieving balanced growth between manufacturing and construction is crucial to effectively mitigating volatility in export and import growth rates and enhancing long-term trade stability and resilience.