The Structural Determinants of External Vulnerability

The authors examine empirically how domestic structural characteristics related to openness and product- and factor-market flexibility influence the impact that terms-of-trade shocks can have on aggregate output. For this purpose, they apply an econometric methodology based on semi-structural vector auto-regressions to a panel of 90 countries with annual observations for the period 1974-2000. Using this methodology, the authors isolate and standardize the shocks, estimate their impact on GDP, and examine how this impact depends on the domestic conditions outlined above. They find that larger trade openness magnifies the output impact of external shocks, particularly the negative ones, while improvements in labor market flexibility and financial openness reduce their impact. Domestic financial depth has a more nuanced role in stabilizing the economy. It helps reduce the impact of external shocks particularly in environments of high exposure-that is, when trade and financial openness are high, firm entry is unrestricted, and labor markets are rigid.

Bibliographic Details

Main Authors:	Loayza, Norman V., Raddatz, Claudio
Language:	English en_US
Published:	World Bank, Washington, DC 2006-12
Subjects:	ADVERSE SHOCKS, AGGREGATE OUTPUT, ASYMMETRIC SHOCKS, AUTOREGRESSION, BENCHMARK, BUSINESS CYCLE, CAPITAL ACCOUNT, CAPITAL FLOWS, CAPITAL MOBILITY, CAPITAL STOCK, COUNTRY CHARACTERISTICS, COUNTRY GROWTH PERFORMANCE, COUNTRY SPECIFIC, COUNTRY-BY-COUNTRY BASIS, COVARIANCE MATRIX, CROSS COUNTRY, CROSS COUNTRY EVIDENCE, CROSS-COUNTRY EVIDENCE, CROSS-COUNTRY REGRESSION, CUMULATIVE EFFECT, CURRENT ACCOUNT, DEPENDENT VARIABLE, DEVELOPED COUNTRIES, DEVELOPING COUNTRIES, DEVELOPMENT ECONOMICS, DIFFERENTIAL IMPACT, DISTRIBUTED LAGS, DOMESTIC CREDIT, ECONOMETRICS, ECONOMIC ACTIVITIES, ECONOMIC FLUCTUATIONS, ECONOMIC GROWTH, ECONOMIC PERFORMANCE, ECONOMIC REVIEW, ECONOMIC STUDIES, EMERGING COUNTRIES, EMERGING ECONOMIES, EMERGING MARKETS, EMPIRICAL ANALYSIS, EMPIRICAL GROWTH LITERATURE, EMPIRICAL RESULTS, EXCHANGE RATE, EXCHANGE RATE REGIME, EXCHANGE RATE REGIMES, EXCHANGE RATES, EXOGENOUS SHOCKS, EXOGENOUS VARIABLE, EXOGENOUS VARIABLES, EXPORT PRICES, EXPORTS, EXTERNAL SHOCK, EXTERNAL SHOCKS, FINANCIAL DEPTH, FINANCIAL DEVELOPMENT, FINANCIAL ECONOMICS, FINANCIAL INSTITUTIONS, FINANCIAL INTEGRATION, FINANCIAL MARKETS, FINANCIAL OPENNESS, FLOATING REGIMES, FOREIGN EXCHANGE, GDP, GDP PER CAPITA, GRANGER CAUSALITY, GROWTH PERFORMANCE, GROWTH VOLATILITY, IDENTIFICATION ASSUMPTIONS, IMPORT PRICES, INCOME, INCOME LEVELS, INTERNATIONAL COMPARABILITY, LABOR MARKET, LABOR MARKETS, LIQUIDITY, LOW-INCOME COUNTRIES, MACROECONOMIC FLUCTUATIONS, MACROECONOMIC MODELS, MACROECONOMIC PERFORMANCE, MACROECONOMIC POLICY, MACROECONOMIC STABILITY, MACROECONOMIC VARIABLES, MACROECONOMIC VOLATILITY, MACROECONOMICS, MEAN CHANGE, MEASURES OF VOLATILITY, MIDDLE EAST, MIDDLE-INCOME COUNTRIES, MONETARY ECONOMICS, NATIONAL ACCOUNTS, NEGATIVE COEFFICIENT, NEGATIVE EFFECT, NEGATIVE SHOCKS, NEGATIVE TERMS, NET WORTH, NORTH AFRICA, 0 HYPOTHESIS, OPEN ECONOMIES, OPEN ECONOMY, OUTPUT GROWTH, OUTPUT PER CAPITA, OUTPUT VOLATILITY, POINT ESTIMATES, POLICY RESEARCH, POLITICAL ECONOMY, POSITIVE ROLE, POSITIVE SHOCKS, PRIVATE SECTOR, PRODUCT MARKET, REAL GDP, REGRESSION ANALYSIS, RELATIVE IMPORTANCE, SIGNIFICANT EFFECT, SIGNIFICANT IMPACT, STRUCTURAL CHARACTERISTICS, SUB-SAHARAN AFRICA, TERMS OF TRADE, TERMS-OF-TRADE SHOCKS, TRADE DATA, TRADE OPENNESS, TRADE SHOCKS, TRANSMISSION OF SHOCKS, UNDUE INFLUENCE, VOLUME OF TRADE, VULNERABILITY TO SHOCKS, WESTERN EUROPE,
Online Access:	http://documents.worldbank.org/curated/en/2006/12/7259016/structural-determinants-external-vulnerability https://hdl.handle.net/10986/9279
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