Globalization and the New Normal

This study expands the empirical specification of Cerra and Saxena (2008), and allows short-termoutput growth regimes to be determined by globalization. Relying on a non-linear dynamic panelrepresentation, it reconciles the earlier results in the literature regarding the two oppositenarratives of the effects of globalization on output growth. Countries experience higher growth, onaverage, the more open and integrated they are into the world. However, once they reach a certainglobalization threshold (endogenously estimated), countries may also experience a new normal,persistently lower short-term output growth following a financial crisis. The benefits, as well asvulnerabilities, accrue earlier in the globalization process for low- and middle-income countries.To solely reap the globalization benefits on growth, sound policies should be in place to mitigatethe negative effects stemming from increased vulnerabilities brought by globalization