The Structural Determinants of External Vulnerability Norman V. Loayza and Claudio Raddatz This article examines empirically how domestic structural characteristics related to openness and product- and factor-market flexibility influence the impact of terms of trade shocks on aggregate output. Applying semistructural vector autoregressions to a panel of 88 countries with annual observations for the period 1974 2000, the analysis isolates and standardizes the shocks, estimates their impact on GDP, and examines how this impact depends on the domestic conditions outlined above. This article takes a different approach and directly estimates the output impact of external shocks using semistructural vector autoregression analysis, as applied to panel data (cross-country, time-series) of aggregate variables. Controlling for the size of the shock, the analysis accounts for its interaction with the set of country characteristics under analysis and estimates its conditional output impact. The Chinn Ito index corresponds to the first principal components of the following four binary variables reported in the International Monetary Fund's Annual Report on Exchange Arrangements and Exchange Restrictions (various issues): existence of multiple exchange rates, restrictions on current account, capital account transactions, and the existence of requirements to surrender export proceedings. Robustness This section examines the robustness of the basic results to changes in measurement of the terms of trade shock, in the sample of countries, the application of a longer lag structure in the estimated vector autoregressions, the inclusion of the exchange rate regime as a country characteristic, and implementation of an alternative method of estimating the effects of structural characteristics. This result is only tentative, however, as a complete analysis of the role of the exchange rate regime requires treatment of measurement issues that is outside the scope of this article. In contrast to the basic case, the interactions model indicates a relevant though nuanced role for financial depth in affecting the impact of external shocks: deepening domestic financial markets can reduce the impact of external shocks when international trade and financial markets are open. These results are robust to checking for mechanical interpretations of the trade-related results, placing stricter restrictions to guarantee shock exogeneity, concentrating exclusively on developing countries, using a longer lag structure for the vector autoregressions, controlling in addition for the exchange rate regime and allowing full heterogeneity in the estimation of country impulse responses. Similarly, the findings indicate that greater financial openness in an environment of underdeveloped local financial markets may result in an increase in the impact of external shocks.