Openness, Specialization, and the External Vulnerability of Developing Countries
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World Bank, Washington, DC
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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.
Palabras clave
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, REAL GDP, 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, EXCHANGE RATE REGIME, 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