Openness, Specialization, and the External Vulnerability of Developing Countries

Deepening real and financial integration of developing countries into the world economy has prompted renewed interest in the contribution of external shocks to their macroeconomic fluctuations. This paper revisits the issue using four decades of an...

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Bibliographic Details
Main Authors:	Barrot, Luis-Diego, Calderon, Cesar, Serven, Luis
Format:	Working Paper
Language:	English en_US
Published:	World Bank, Washington, DC 2016
Subjects:	INTERNATIONAL INTEREST RATE MONETARY POLICY REAL SHOCKS ECONOMIC ENVIRONMENT TRADE SHOCK SMALL ECONOMIES CLOSED ECONOMIES MULTIPLIERS ADJUSTMENT PATH RELATIVE PRICE LAGS SUPPLY CURVE SHORT-TERM INTEREST RATES GLOBAL MARKETS INCOME INTEREST DYNAMIC ADJUSTMENT EMERGING ECONOMIES INTEREST RATE REAL GDP EXCHANGE GDP PER CAPITA DEVELOPING COUNTRIES EXPORTS DEVELOPING ECONOMIES EXPORTERS ECONOMIC STRUCTURE INTERNATIONAL BUSINESS BONDS VARIABLES TRADE OPENNESS PRICE INTERNATIONAL INTEREST FINANCIAL INTEGRATION TREASURY BILL INFLATION TRENDS EMERGING MARKET ECONOMIES ADVANCED COUNTRIES INTERNATIONAL FINANCE STANDARD DEVIATION INTERNATIONAL INTEREST RATES CAPITAL OUTFLOW EXCHANGE RATE REGIME FINANCIAL VARIABLES ENDOGENOUS VARIABLE EXOGENOUS SHOCKS PRODUCTION STRUCTURE CURRENCY TRADE SHOCKS DEVELOPMENT ECONOMICS COVARIANCE MATRIX STRUCTURAL SHOCK ADVANCED ECONOMIES EXOGENOUS VARIABLES STRUCTURAL SHOCKS LOW-INCOME COUNTRIES CURRENT ACCOUNT CURRENT ACCOUNT SURPLUS SURPLUS EXCHANGE RATES ECONOMETRICS INTEREST RATES INTEREST RATE SHOCKS SUPPLY SHOCKS GLOBALIZATION NATURAL DISASTERS LOW- INCOME COUNTRIES EMERGING MARKET CRITERIA NET EXPORTS MONETARY TRANSMISSION DEBT DOMESTIC INTEREST RATE IMPORTS SUPPLY SHOCK COMMODITY PRICE FOREIGN CURRENCY LIBERALIZATION MARKET ECONOMIES WORLD INTEREST RATES EMERGING MARKETS DATA AVAILABILITY CAPITAL FINANCIAL TRANSACTIONS VOLATILITY BARRIERS VALUE MACROECONOMICS WORLD ECONOMY DEMAND AGGREGATE DEMAND ECONOMIC FLUCTUATIONS ECONOMY AGRICULTURE EXCESS DEMAND CLOSED CAPITAL ACCOUNT RESPONSE TO SHOCKS ASSETS GLOBAL INFLATION ENDOGENOUS VARIABLES CAPITAL ACCOUNT OPENNESS TREASURY OUTPUT PRIMARY COMMODITIES EXPOSURE BUSINESS CYCLES BILL TRADE GDP GOODS INVESTOR THEORY DOMESTIC ECONOMY GROWTH RATE OIL EXPORTERS NATURAL RESOURCE RISK SHARE COMPARATIVE ADVANTAGE GLOBAL OUTPUT SHORT-TERM INTEREST RATE AUTOREGRESSION SUPPLY GLOBAL DEMAND DECLINE IN INFLATION EXTERNAL SHOCKS CYCLICAL ADJUSTMENT COMMODITIES EXCHANGE RATE GDP DEFLATOR COMMODITY PRICES OPEN ECONOMIES COMMODITY ADVERSE EFFECTS CAPITAL ACCOUNT FINANCIAL OPENNESS INFLATION EPISODES PRICES EXCHANGE RATE REGIMES ECONOMIES DEVELOPMENT POLICY
Online Access:	http://documents.worldbank.org/curated/en/2016/06/26506942/openness-specialization-external-vulnerability-developing-countries http://hdl.handle.net/10986/24628

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Summary:	Deepening real and financial integration of developing countries into the world economy has prompted renewed interest in the contribution of external shocks to their macroeconomic fluctuations. This paper revisits the issue using four decades of annual data for a large sample of developing countries. The paper implements a conditionally-homogeneous panel vector autoregression with exogenous variables to model GDP fluctuations in these countries. It uses sign restrictions to identify four external structural shocks -– demand, supply, monetary, and commodity shocks -– and analyzes how their impact on growth is shaped by countries' policy and structural framework. External shocks are found to account for a small share of the forecast error variance of GDP, especially at short horizons. However, their contribution has been on the rise in recent decades. Further, global monetary shocks have become the leading external source of GDP volatility in developing countries. The paper presents a quantitative assessment of the effects of real and financial opening up, as well as those of commodity specialization, on the impact of external shocks on GDP. The results suggest that increasing openness can account for the increasing trend in the volatility attributable to external shocks, as well as the changing roles of different shocks. Moreover, commodity-intensive developing countries are found to be more vulnerable than the rest to all types of external shocks, not just commodity shocks.

Openness, Specialization, and the External Vulnerability of Developing Countries

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