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Does openness to trade make countries more vulnerable to sudden stops, or less? Using gravity to establish causality

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Author Info
Cavallo, Eduardo A.
Frankel, Jeffrey A.

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Abstract

Openness to trade is one factor that has been identified as determining whether a country is prone to sudden stops in capital inflows. Several authors have offered empirical evidence that having a large tradable sector reduces the contraction necessary to adjust to a given cut-off in funding. Such studies may, however, be subject to the problem that trade is endogenous. We use the gravity instrument for trade openness, which is constructed from geographical determinants of bilateral trade. We find that openness indeed makes countries less vulnerable to crises, and that the relationship is even stronger when correcting for the endogeneity of trade.

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Publisher Info
Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 27 (2008)
Issue (Month): 8 (December)
Pages: 1430-1452
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Handle: RePEc:eee:jimfin:v:27:y:2008:i:8:p:1430-1452

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Web page: http://www.elsevier.com/locate/inca/30443

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Keywords: Sudden stops Current account adjustment Trade Gravity model;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    Other versions:
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    Other versions:
  16. Carlos Arteta, 2002. "Exchange Rate Regimes and Financial Dollarization: Does Flexibility Reduce Bank Currency Mismatches?," Center for International and Development Economics Research, Working Paper Series 1021, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley. [Downloadable!]
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  24. Roberto Chang & Andres Velasco, 1998. "Financial Crises in Emerging Markets," NBER Working Papers 6606, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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