The Structural Determinants of External Vulnerability

By Norman V. Loayza, Claudio E. Raddatz. 2006

181 citations recorded by the source corpus.

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.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/fedd9f7cd1d69013d9cbe9f399fcd442f3f739b8

Citations in the corpus

• Revisiting the Link between Finance and Macroeconomic Volatility (2013, unknown): “Beck et al. (2006), find weak evidence that financial intermediaries dampen the effect of terms of trade shocks on output volatility, while Loayza and Raddatz (2007) find that domestic financial depth plays a role in stabilizing more open economies.3 III.”
• How do governments respond after catastrophes ? natural-disaster shocks and the fiscal stance (2011, unknown): “This set includes all the conventional macroeconomic variables typically included in macro models (see Monacelli (2005), Linde et al (2008), and Adolfson (2001), among others).”