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The structural determinants of external vulnerability

Norman Loayza () and Claudio Raddatz

No 4089, Policy Research Working Paper Series from The World Bank

Abstract: 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.

Keywords: Achieving Shared Growth; Free Trade; Economic Theory&Research; Inequality; Macroeconomic Management (search for similar items in EconPapers)
Date: 2006-12-01
New Economics Papers: this item is included in nep-dev, nep-ltv and nep-mac
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Journal Article: The Structural Determinants of External Vulnerability (2007) Downloads
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