By Jean Imbs, Laurent Pauwels
The pandemic and the war in Ukraine have resuscitated concerns over exposure to foreign shocks. But while measures of ‘openness’ abound, their ability to capture the influence of foreign developments on domestic outcomes remains speculative. This column uses an international model with rich linkages to explore the ability of several openness measures to replicate the simulated responses of economic activity to foreign shocks. The authors find the exposure to foreign shocks is best captured by a measure that computes the fraction of output sold abroad, both directly and indirectly via the global value chain.
Link: Measuring openness