The Structural Determinants of External Vulnerability |
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| Authors: | Loayza, Norman V. Raddatz, Claudio |
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| Affiliation: | Norman V. Loayza (corresponding author) is a lead economist at the World Bank; his email address is nloayza{at}worldbank.org
Claudio Raddatz is an economist at the World Bank; his email address is craddatz{at}worldbank.org |
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| Abstract: | This article examines empirically how domestic structural characteristicsrelated to openness and product- and factor-market flexibilityinfluence the impact of terms of trade shocks on aggregate output.Applying semistructural vector autoregressions to a panel of88 countries with annual observations for the period 1974–2000,the analysis isolates and standardizes the shocks, estimatestheir impact on GDP, and examines how this impact depends onthe domestic conditions outlined above. The article finds thatgreater trade openness magnifies the output impact of termsof trade shocks, particularly negative ones, while financialopenness reduces their impact. Flexibility of labor and firm-entryare beneficial, with labor flexibility dampening the impactof negative shocks and ease of firm-entry magnifying positiveones only. Domestic financial depth has a more nuanced rolein stabilizing the economy. Analysis of interactions acrossstructural determinants reveals complementarities among macroeconomicconditions (trade and financial openness and depth) and, separately,among microeconomic conditions (flexibility of labor marketsand ease of firm-entry). Variables across these groups tendto behave as substitutes for each other. |
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