The Structural Determinants of External Vulnerability

creativeworkseries.issn 1564-698X Loayza, Norman V. Raddatz, Claudio 2012-03-30T07:12:36Z 2012-03-30T07:12:36Z 2007-09-30
dc.description.abstract The Structural Determinants of External Vulnerability Norman V. Loayza and Claudio Raddatz This article examines empirically how domestic structural characteristics related to openness and product- and factor-market flexibility influence the impact of terms of trade shocks on aggregate output. Applying semistructural vector autoregressions to a panel of 88 countries with annual observations for the period 1974 2000, the analysis isolates and standardizes the shocks, estimates their impact on GDP, and examines how this impact depends on the domestic conditions outlined above. This article takes a different approach and directly estimates the output impact of external shocks using semistructural vector autoregression analysis, as applied to panel data (cross-country, time-series) of aggregate variables. Controlling for the size of the shock, the analysis accounts for its interaction with the set of country characteristics under analysis and estimates its conditional output impact. The Chinn Ito index corresponds to the first principal components of the following four binary variables reported in the International Monetary Fund's Annual Report on Exchange Arrangements and Exchange Restrictions (various issues): existence of multiple exchange rates, restrictions on current account, capital account transactions, and the existence of requirements to surrender export proceedings. Robustness This section examines the robustness of the basic results to changes in measurement of the terms of trade shock, in the sample of countries, the application of a longer lag structure in the estimated vector autoregressions, the inclusion of the exchange rate regime as a country characteristic, and implementation of an alternative method of estimating the effects of structural characteristics. This result is only tentative, however, as a complete analysis of the role of the exchange rate regime requires treatment of measurement issues that is outside the scope of this article. In contrast to the basic case, the interactions model indicates a relevant though nuanced role for financial depth in affecting the impact of external shocks: deepening domestic financial markets can reduce the impact of external shocks when international trade and financial markets are open. These results are robust to checking for mechanical interpretations of the trade-related results, placing stricter restrictions to guarantee shock exogeneity, concentrating exclusively on developing countries, using a longer lag structure for the vector autoregressions, controlling in addition for the exchange rate regime and allowing full heterogeneity in the estimation of country impulse responses. Similarly, the findings indicate that greater financial openness in an environment of underdeveloped local financial markets may result in an increase in the impact of external shocks. en
dc.identifier.citation World Bank Economic Review
dc.identifier.issn 1564-698X
dc.publisher World Bank
dc.relation.ispartofseries World Bank Economic Review
dc.rights CC BY-NC-ND 3.0 IGO
dc.rights.holder World Bank
dc.subject business cycle
dc.subject external shocks
dc.subject growth volatility
dc.subject labor markets
dc.subject macroeconomic stability
dc.subject Macroeconomic volatility
dc.subject openness
dc.subject terms of trade
dc.subject terms of trade shocks
dc.subject trade openness
dc.title The Structural Determinants of External Vulnerability en
dc.type Journal Article en
dc.type Article de journal fr
dc.type Artículo de revista es
dspace.entity.type Publication
dspace.entity.type Publication
okr.doctype Journal Article
okr.globalpractice Macroeconomics and Fiscal Management
okr.globalpractice Poverty
okr.globalpractice Finance and Markets
okr.globalpractice Trade and Competitiveness 3
okr.language.supported en
okr.pagenumber 359
okr.pagenumber 387
okr.pdfurl wber_21_3_359.pdf en
okr.peerreview Academic Peer Review Ghana China Singapore Argentina Chile
okr.region.geographical Africa
okr.region.geographical Latin America
okr.topic International Economics and Trade
okr.topic Macroeconomics and Economic Growth
okr.topic International Economics and Trade :: Free Trade
okr.topic Economic Theory and Research
okr.topic Poverty Reduction :: Pro-Poor Growth
okr.topic Private Sector Development :: Emerging Markets
okr.topic Finance and Financial Sector Development :: Currencies and Exchange Rates
okr.volume 21
relation.isJournalIssueOfPublication b95cbe89-7d17-488a-afcf-746a0a4dcfea
relation.isJournalOfPublication c41eae2f-cf94-449d-86b7-f062aebe893f
relation.isJournalVolumeOfPublication 5586d687-0acc-4416-ace0-8fcc3b13a63e
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