Measuring External Shock and Domestic Response in LDCs: Completing Ballassa's Decomposition Method
The standard method for measuring external shocks transmitted to small open economies from the world economy was originally developed by Balassa and subsequently refined by McCarthy for the World Bank and Helleiner for the UNC-TAD. This paper critically evaluates its neglect of the consequences of non-marginal changes in the exogenous variables, and sets out a corrected methodology which takes into account the second-order effects and distinguishes domestic reaction from policy response. The improved method is applied in detail to a single country (Mexico) and also to a cross-section of twenty-four LDCs for the 1970s and 1980s; and is shown to generate considerably more information than the standard method from a similar data base. © 1997 John Wiley & Sons, Ltd.
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Volume (Year): 9 (1997)
Issue (Month): 5 ()
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- Dornbusch, Rudiger & Helmers, F. Leslie C. H. (ed.), 1988. "The Open Economy: Tools for Policymakers in Developing Countries," OUP Catalogue, Oxford University Press, number 9780195207095, December.
- McCarthy, F. Desmond & Dhareshwar, Ashok, 1992. "Economic shocks and the global environment," Policy Research Working Paper Series 870, The World Bank.
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