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Economic shocks and the global environment

  • McCarthy, F. Desmond
  • Dhareshwar, Ashok
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    Policy formulation in most countries is complicated by the role of the external economic environment, especially during periods of great external shocks. The authors examine how individual countries were affected by, and responded to, external shocks. They apply an enhanced version of an earlier methodology for estimating the effect of three kinds of shock: terms of trade, variations in global demand, and changes in the interest rate. They discuss the magnitude of these shocks and country responses to them in Brazil, Ireland, and Korea and present numerical results for some other countries. The authors find that the magnitude of external shocks may be greater than previously recognized. The size and components of the shock depend on such factors as the country's openness to trade, the composition of its imports and exports, and its level of external debt. The authors also found that countries differ greatly in their responses to external shocks. Some rely on additional external financing, some place more emphasis on export promotion, and others favor import substitution. The authors conclude that the magnitude and composition of external shocks should be part of any explanation of why growth rates differ among countries.

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    Paper provided by The World Bank in its series Policy Research Working Paper Series with number 870.

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    Date of creation: 31 Mar 1992
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    Handle: RePEc:wbk:wbrwps:870
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    1. Bruno, Michael, 1982. " Adjustment and Structural Change under Supply Shocks," Scandinavian Journal of Economics, Wiley Blackwell, vol. 84(2), pages 199-221.
    2. T. W.Swan, 1960. "Economic Control In A Dependent Economy," The Economic Record, The Economic Society of Australia, vol. 36(73), pages 51-66, 03.
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