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Are external shocks responsible for the instability of output in low income countries?

  • Raddatz, Claudio

External shocks, such as commodity price fluctuations, natural disasters, and the role of the international economy, are often blamed for the poor economic performance of low-income countries. The author quantifies the impact of these different external shocks using a panel vector autoregression (VAR) approach and compares their relative contributions to output volatility in low-income countries vis-à-vis internal factors. He finds that external shocks can only explain a small fraction of the output variance of a typical low-income country. Internal factors are the main source of fluctuations. From a quantitative perspective, the output effect of external shocks is typically small in absolute terms, but significant relative to the historic performance of these countries.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 3680.

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Date of creation: 01 Aug 2005
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Handle: RePEc:wbk:wbrwps:3680
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