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Does Openness Imply Greater Vulnerability?

  • César Calderón
  • Norman V. Loayza
  • Klaus Schmidt-Hebbel

This paper provides an empirical evaluation of external vulnerability using panel data methods for a worldwide sample of countries. Controlling for domestic conditions, the paper examines the growth volatility effects of outcome measures of trade and financial openness as well as four types of foreign shocks: terms of trade changes, trading partners' growth rates, international real interest rate changes, and net regional capital inflows. The paper analyzes the possibility of non-linearities by allowing the growth volatility effects of openness to vary with the general level of economic development and by letting the effects of foreign shocks depend on the degree of trade and financial integration. The results are mixed regarding international integration: while trade opening tends to increase growth volatility, financial opening reduces volatility directly and indirectly by dampening the effects of external shocks.

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Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 485.

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Date of creation: Sep 2008
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Handle: RePEc:chb:bcchwp:485
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