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External Conditions and Growth Performance

In: External Vulnerability and Preventive Policies

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Author Info

  • César Calderón

    (Banco Mundial)

  • Norman Loayza

    (Banco Mundial)

  • Klaus Schmidt-Hebbel

    (Pontificia Universidad Católica de Chile)

Abstract

This paper provides an empirical evaluation of the influence of external conditions and international integration on growth performance, using panel methods for a large cross-country data set. Controlling for domestic conditions, the paper examines the growth effects of trade and financial integration as well as four types of foreign shocks: terms of trade changes, trading partners' GDP growth, changes in international real interest rates, and net regional capital inflows. We analyze the possibility of nonlinearities by allowing the growth effects of openness to vary with the general level of economic development and by letting the effects of foreign shocks to depend on the degree of trade and financial integration. The findings point toward non-monotonic effects of openness, in the sense that the growth effects of trade and financial openness increase with the level of development, tapering off for high levels of income. In addition, the paper finds that trade openness tends to dampen the growth effect of trade-related shocks while amplifying the shocks related to financial markets. Interestingly, financial openness tends to have the opposite effect.

(This abstract was borrowed from another version of this item.)

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Bibliographic Info

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This chapter was published in: Ricardo Caballero & César Calderón & Luis Felipe Céspedes & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series Editor) (ed.) External Vulnerability and Preventive Policies, , chapter 3, pages 041-070, 2006.

This item is provided by Central Bank of Chile in its series Central Banking, Analysis, and Economic Policies Book Series with number v10c03pp041-070.

Handle: RePEc:chb:bcchsb:v10c03pp041-070

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  1. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2001. "The external wealth of nations: measures of foreign assets and liabilities for industrial and developing countries," Journal of International Economics, Elsevier, Elsevier, vol. 55(2), pages 263-294, December.
  2. World Bank, 2002. "World Development Indicators 2002," World Bank Publications, The World Bank, number 13921, August.
  3. Michael W. Klein, 2003. "Capital Account Openness and the Varieties of Growth Experience," NBER Working Papers 9500, National Bureau of Economic Research, Inc.
  4. Vittorio Grilli & Gian-Maria Milesi-Ferretti, 1995. "Economic Effects and Structural Determinants of Capital Controls," IMF Working Papers 95/31, International Monetary Fund.
  5. Blankenau, William & Ayhan Kose, M. & Yi, Kei-Mu, 2001. "Can world real interest rates explain business cycles in a small open economy?," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 25(6-7), pages 867-889, June.
  6. Irwin, Douglas A. & Tervio, Marko, 2002. "Does trade raise income?: Evidence from the twentieth century," Journal of International Economics, Elsevier, Elsevier, vol. 58(1), pages 1-18, October.
  7. Marco Terrones & Eswar Prasad & M. Ayhan Kose, 2003. "Financial Integration and Macroeconomic Volatility," IMF Working Papers 03/50, International Monetary Fund.
  8. Summers, Robert & Heston, Alan, 1991. "The Penn World Table (Mark 5): An Expanded Set of International Comparisons, 1950-1988," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 106(2), pages 327-68, May.
  9. Kose, M. Ayhan & Prasad, Eswar S. & Terrones, Marco E., 2006. "How do trade and financial integration affect the relationship between growth and volatility?," Journal of International Economics, Elsevier, Elsevier, vol. 69(1), pages 176-202, June.
  10. Elbadawi, Ibrahim & Schmidt-Hebbel, Klaus, 1998. "Macroeconomic Policies, Instability and Growth in the World," Journal of African Economies, Centre for the Study of African Economies (CSAE), Centre for the Study of African Economies (CSAE), vol. 7(0), pages 116-68, December.
  11. Edwards, Sebastian, 1993. "Openness, Trade Liberalization, and Growth in Developing Countries," Journal of Economic Literature, American Economic Association, vol. 31(3), pages 1358-93, September.
  12. M. Ayhan Kose & Eswar Prasad & Kenneth Rogoff & Shang-Jin Wei, 2006. "Financial Globalization," IMF Working Papers 06/189, International Monetary Fund.
  13. César Calderón & Klaus Schmidt-Hebbel, 2003. "Macroeconomic Policies and Performance in Latin America," Working Papers Central Bank of Chile, Central Bank of Chile 217, Central Bank of Chile.
  14. Sebastian Edwards, 2001. "Capital Mobility and Economic Performance: Are Emerging Economies Different?," NBER Working Papers 8076, National Bureau of Economic Research, Inc.
  15. Romain Wacziarg & Karen Horn Welch, 2008. "Trade Liberalization and Growth: New Evidence," World Bank Economic Review, World Bank Group, World Bank Group, vol. 22(2), pages 187-231, June.
  16. Beck, Thorsten & Demirguc-Kunt, Asli & Levine, Ross, 1999. "A new database on financial development and structure," Policy Research Working Paper Series 2146, The World Bank.
  17. Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, Elsevier, vol. 68(1), pages 29-51, July.
  18. Dani Rodrik & Arvind Subramanian & Francesco Trebbi, 2004. "Institutions Rule: The Primacy of Institutions Over Geography and Integration in Economic Development," Journal of Economic Growth, Springer, Springer, vol. 9(2), pages 131-165, 06.
  19. Shang-Jin Wei & Irina Tytell, 2004. "Does Financial Globalization Induce Better Macroeconomic Policies?," IMF Working Papers 04/84, International Monetary Fund.
  20. Ben-David, Dan, 1993. "Equalizing Exchange: Trade Liberalization and Income Convergence," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 108(3), pages 653-79, August.
  21. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 58(2), pages 277-97, April.
  22. Sebastian Edwards, 1997. "Openness, Productivity and Growth: What Do We Really Know?," NBER Working Papers 5978, National Bureau of Economic Research, Inc.
  23. Barry P. Bosworth & Susan M. Collins, 1999. "Capital Flows to Developing Economies: Implications for Saving and Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 30(1), pages 143-180.
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Citations

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Cited by:
  1. Roberto Chang, & Linda Kaltani & Norman Loayza, 2006. "Openness Can be Good for Growth: The Role of Policy Complementarities," Working Papers Central Bank of Chile, Central Bank of Chile 373, Central Bank of Chile.
  2. Klaus Schmidt-Hebbel, 2010. "Macroeconomic Regimes, Policies, and Outcomes in the World," Documentos de Trabajo, Instituto de Economia. Pontificia Universidad Católica de Chile. 386, Instituto de Economia. Pontificia Universidad Católica de Chile..
  3. Vittorio Corbo & Klaus Schmidt-Hebbel, 2011. "The International Crisis and Latin America: Growth Effects and Development Strategies," CASE Network Studies and Analyses, CASE-Center for Social and Economic Research 429, CASE-Center for Social and Economic Research.
  4. Klaus Schmidt-Hebbel, 2006. "Chile's Economic Growth," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 43(127), pages 5-48.
  5. Yunyong Thaicharoen & Sra Chuenchoksan & Ashvin Ahuja, 2007. "Big elephants in small ponds: Risk absorption, risk diversification and management of capital flows," Working Papers 2007-02, Economic Research Department, Bank of Thailand.

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