“The Structural Determinants of External Vulnerability”

by Norman Loayza and Claudio Raddatz

Comments prepared by Paolo Mauro, Research Dept., International Monetary Fund

• Interesting and extremely relevant topic, clear hypothesis, analysis tight and on the mark, plausible results.

• Terms of trade shocks have larger impact when: trade openness, financial openness, and flexible labor market.

• Putting results in context (relevance of terms of trade shocks), clarification questions, and suggestions for further analysis.

Are terms of trade shocks relevant? Expected Cost of Shocks (years of output lost in output drops--note advanced countries not in chart)

0.00 0.20 0.40 0.60 0.80 1.00

Wars

Banking crises

Disasters

Terms of trade

Oil shocks

Interest rate hikes

Debt crises

Currency crises

Political shocks

Sudden stops

Emerging markets

Developing countries

(Based on concluded events)

0.00 0.50 1.00 1.50 2.00 2.50 3.00

Disasters

Currency crises

Political shocks

Banking crises

Oil shocks

Wars

Sudden stops

Debt crises

Interest rate hikes

Terms of trade

Emerging markets

Developing countries

(Based on all events, including ongoing)

Show more on t-o-t shocks

• Size, frequency, persistence (Cashin et al.); how large are the largest; when do they take place (in all countries at the same time? Affects absolute magnitude of impact); what if just commodity prices; exogeneity of t-o-t beyond commodities and computer chips.

• Is a t-o-t shock for Nigeria the same as for Portugal? If not, are the differences uncorrelated with structural characteristics?

Clarification/presentation questions

• Rationale for VARs. (No feedback from output to terms of trade; impulse response functions show jump, then flat; focus is on cumulative output impact). Charts for output or growth in event time?

• Influential observations

• Going from equation on page 6 to high/low tables

More on Labor Market Flexibility

• Index for developing countries: de jure vs. de facto, formal or informal sector,…

• Show impact on labor market variables (wages, profit margins, sectoral employment)

• Less on financial depth• Struggling to explain absence of link with

finance; issue of endogeneity (why only here?); and why would fin depth reduce volat of tot? (and control for GDP p/c in Figure 4)

More structural characteristics• Size of government (smoothing role, Rodrik)• Exchange rate regime (difficult because tot

shocks can lead to devaluations—either do it in depth, or not at all)

• Some de facto measures of K account openness• Institutional/political factors • More recognition of endogeneityMore outcomes• Impact on consumption rather than output• Impact on policy variables (other means of

smoothing)• Triggering banking crises or devaluations