Harvard Kennedy School Harvard University

Search this site

logo
Faculty Research Working Paper Series
Jeffrey A. Frankel
James W. Harpel Professor of Capital Formation and Growth
phone: (617)496-3834
fax: (617)496-5747
Does Openness to Trade Make Countries More Vulnerable to Sudden Stops, or Less? Using Gravity to Establish Causality.
Frankel, Jeffrey A., and Eduardo Cavallo. "Does Openness to Trade Make Countries More Vulnerable to Sudden Stops, or Less? Using Gravity to Establish Causality." KSG Faculty Research Working Paper Series RWP04-038, August 2004.
Abstract
Openness to trade is one factor that has been identified as determining whether a country is prone to sudden stops in capital inflow, currency crashes, or severe recessions. Some believe that openness raises vulnerability to foreign shocks, while others believe that it makes adjustment to crises less painful. Several authors have offered empirical evidence that having a large tradable sector reduces the contraction necessary to adjust to a given cut-off in funding. This would help explain lower vulnerability to crises in Asia than in Latin America. Such studies may, however, be subject to the problem that trade is endogenous. We use the gravity instrument for trade openness, which is constructed from geographical determinants of bilateral trade. We find that openness indeed makes countries less vulnerable, both to severe sudden stops and currency crashes, and that the relationship is even stronger when correcting for the endogeneity of trade.
Attachment
pdf

 

 


Copyright © 2017 The President and Fellows of Harvard College