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Openness and Growth Volatility


  • César Calderón
  • Klaus Schmidt-Hebbel


Macroeconomic volatility is the outcome of countries’ exposure to shocks (the magnitude and frequency of shocks that hit their economies) and their vulnerability (the ability to respond to these shocks). This paper conjectures that countries with higher degrees of trade and financial integration are better prepared to withstand shocks to output growth. Theoretically, the impact of trade and financial openness is ambiguous. Hence, our problem becomes an empirical one. Using a sample of 82 countries for the period 1975-2005, we find that the response of growth volatility to rising trade and financial openness depends upon some country characteristics. We find that: (a) trade openness stabilizes output fluctuations in countries with well-diversified economic structures, (b) financial openness mitigates growth volatility in countries with low debt-equity ratios, (c) domestic financial depth helps smoothing out the destabilizing effect of financial openness on growth volatility, (d) countries with higher trade openness are less prone to output drops, and (e) countries with higher financial openness are more likely to experience sharp drops in real output only if their external liabilities are more biased towards debt than equity.

Suggested Citation

  • César Calderón & Klaus Schmidt-Hebbel, 2008. "Openness and Growth Volatility," Working Papers Central Bank of Chile 483, Central Bank of Chile.
  • Handle: RePEc:chb:bcchwp:483

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    References listed on IDEAS

    1. Raphael Bergoeing Vela & Andrés Hernando & Andrea Repetto, 2010. "Market Reforms and Efficiency Gains in Chile," Estudios de Economia, University of Chile, Department of Economics, vol. 37(2 Year 20), pages 217-242, December.
    2. Olley, G Steven & Pakes, Ariel, 1996. "The Dynamics of Productivity in the Telecommunications Equipment Industry," Econometrica, Econometric Society, vol. 64(6), pages 1263-1297, November.
    3. Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 87(1), pages 115-143, August.
    4. O'Ryan, Raúl & De Miguel, Carlos J. & Pereira, Mauricio & Lagos, Camilo, 2008. "Impactos económicos y sociales de shocks energéticos en Chile: un análisis de equilibrio general," Medio Ambiente y Desarrollo 136, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    5. Boris Lokshin & René Belderbos & Martin Carree, 2008. "The Productivity Effects of Internal and External R&D: Evidence from a Dynamic Panel Data Model," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 70(3), pages 399-413, June.
    6. James Levinsohn & Amil Petrin, 2003. "Estimating Production Functions Using Inputs to Control for Unobservables," Review of Economic Studies, Oxford University Press, vol. 70(2), pages 317-341.
    7. Mark Doms & Eric J. Bartelsman, 2000. "Understanding Productivity: Lessons from Longitudinal Microdata," Journal of Economic Literature, American Economic Association, vol. 38(3), pages 569-594, September.
    8. Rotemberg, Julio J & Woodford, Michael, 1996. "Imperfect Competition and the Effects of Energy Price Increases on Economic Activity," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(4), pages 550-577, November.
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    Cited by:

    1. Nyang`oro Owen, 2017. "Working Paper 285 - Capital Inflows and Economic Growth in Sub-Saharan Africa," Working Paper Series 2409, African Development Bank.
    2. Balavac, Merima & Pugh, Geoff, 2016. "The link between trade openness, export diversification, institutions and output volatility in transition countries," Economic Systems, Elsevier, vol. 40(2), pages 273-287.
    3. Riyad Abubaker, 2015. "The asymmetric impact of trade openness on output volatility," Empirical Economics, Springer, vol. 49(3), pages 881-887, November.

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