“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)

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 endogeneity More outcomes Impact on consumption rather than output Impact on policy variables (other means of smoothing) Triggering banking crises or devaluations