The Structural Determinants of External Vulnerability

Posted: 16 Jun 2008

See all articles by Norman Loayza

Norman Loayza

World Bank - Research Department

Claudio E. Raddatz

Central Bank of Chile; World Bank

Multiple version iconThere are 2 versions of this paper

Date Written: 2007

Abstract

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. The article finds that greater trade openness magnifies the output impact of terms of trade shocks, particularly negative ones, while financial openness reduces their impact. Flexibility of labor and firm-entry are beneficial, with labor flexibility dampening the impact of negative shocks and ease of firm-entry magnifying positive ones only. Domestic financial depth has a more nuanced role in stabilizing the economy. Analysis of interactions across structural determinants reveals complementarities among macroeconomic conditions (trade and financial openness and depth) and, separately, among microeconomic conditions (flexibility of labor markets and ease of firm-entry). Variables across these groups tend to behave as substitutes for each other.

Keywords: F36, F41, F43

Suggested Citation

Loayza, Norman and Raddatz, Claudio E., The Structural Determinants of External Vulnerability (2007). The World Bank Economic Review, Vol. 21, Issue 3, pp. 359-387, 2007. Available at SSRN: https://ssrn.com/abstract=1146052 or http://dx.doi.org/lhm018

Norman Loayza (Contact Author)

World Bank - Research Department ( email )

1818 H Street, N.W.
Washington, DC 20433
United States

Claudio E. Raddatz

Central Bank of Chile ( email )

United States

World Bank ( email )

1818 H Street, N.W.
Washington, DC 20433
United States

Register to save articles to
your library

Register

Paper statistics

Abstract Views
460
PlumX Metrics