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External Conditions and Growth Performance

  • César Calderón
  • Norman Loayza
  • Klaus Schmidt-Hebbel

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.

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Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 292.

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Date of creation: Dec 2004
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Handle: RePEc:chb:bcchwp:292
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  1. Sebastian Edwards, 1997. "Openness, Productivity and Growth: What Do We Really Know?," NBER Working Papers 5978, National Bureau of Economic Research, Inc.
  2. M. Ayhan Kose & Eswar S. Prasad & Marco E. Terrones, 2004. "How do trade and financial integration affect the relationship between growth and volatility," Working Paper Series 2004-29, Federal Reserve Bank of San Francisco.
  3. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Oxford University Press, vol. 58(2), pages 277-297.
  4. Marco Terrones & Eswar Prasad & M. Ayhan Kose, 2003. "Financial Integration and Macroeconomic Volatility," IMF Working Papers 03/50, International Monetary Fund.
  5. Alesina, Alberto & Spolaore, Enrico & Wacziarg, Romain, 2005. "Trade, Growth and the Size of Countries," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 23, pages 1499-1542 Elsevier.
  6. Calderon, Cesar & Schmidt-Hebbel, Klaus, 2003. "Macroeconomic policies and performance in Latin America," Journal of International Money and Finance, Elsevier, vol. 22(7), pages 895-923, December.
  7. Dan Ben-David, 1993. "Equalizing Exchange: Trade Liberalization and Income Convergence," The Quarterly Journal of Economics, Oxford University Press, vol. 108(3), pages 653-679.
  8. M Ayhan Kose & Eswar Prasad & Kenneth Rogoff & Shang-Jin Wei, 2009. "Financial Globalization: A Reappraisal," IMF Staff Papers, Palgrave Macmillan, vol. 56(1), pages 8-62, April.
  9. Philip Lane & Gian Maria Milesi-Ferretti, 2001. "THE EXTERNAL WEALTH OF NATIONS: Measures of Foreign Assets and Liabilities For Industrial and Developing Countries," CEG Working Papers 20012, Trinity College Dublin, Department of Economics.
  10. Wacziarg, Romain & Welch, Karen Horn, 2003. "Trade Liberalization and Growth: New Evidence," Research Papers 1826, Stanford University, Graduate School of Business.
  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 Arellano & O Bover, 1990. "Another Look at the Instrumental Variable Estimation of Error-Components Models," CEP Discussion Papers dp0007, Centre for Economic Performance, LSE.
  13. William Blankenau & M. Ayhan Kose & Kei-Mu Yi, 1999. "Can world real interest rates explain business cycles in a small open economy?," Staff Reports 94, Federal Reserve Bank of New York.
  14. 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), vol. 7(0), pages 116-68, December.
  15. Michael W. Klein, 2003. "Capital Account Openness and the Varieties of Growth Experience," NBER Working Papers 9500, National Bureau of Economic Research, Inc.
  16. Robert Summers & Alan Heston, 1991. "The Penn World Table (Mark 5): An Expanded Set of International Comparisons, 1950–1988," The Quarterly Journal of Economics, Oxford University Press, vol. 106(2), pages 327-368.
  17. Shang-Jin Wei & Irina Tytell, 2004. "Does Financial Globalization Induce Better Macroeconomic Policies?," IMF Working Papers 04/84, International Monetary Fund.
  18. Vittorio Grilli & Gian-Maria Milesi-Ferretti, 1995. "Economic Effects and Structural Determinants of Capital Controls," IMF Working Papers 95/31, International Monetary Fund.
  19. 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.
  20. Irwin, Douglas A. & Tervio, Marko, 2002. "Does trade raise income?: Evidence from the twentieth century," Journal of International Economics, Elsevier, vol. 58(1), pages 1-18, October.
  21. Sebastian Edwards, 2001. "Capital Mobility and Economic Performance: Are Emerging Economies Different?," NBER Working Papers 8076, National Bureau of Economic Research, Inc.
  22. Rodrik, Dani & Subramanian, Arvind & Trebbi, Francesco, 2002. "Institutions Rule: The Primacy of Institutions Over Geography and Integration in Economic Development," CEPR Discussion Papers 3643, C.E.P.R. Discussion Papers.
  23. World Bank, 2002. "World Development Indicators 2002," World Bank Publications, The World Bank, number 13921.
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