Shocks and Asset Dynamics in Ethiopia

This article uses household survey panel data of 416 rural households to study asset dynamics in the northern highlands of Ethiopia and the response of assets to shocks. The period under examination (1996-2003) was marked by severe environmental shocks, including a series of droughts. The article empirically studies the nature of household asset paths over time, using as the point of departure the theory on precautionary savings behavior. Results indicate that the response of assets to weather shocks, the differential effect of these shocks on liquid and less liquid forms of wealth holdings, and the nature of asset dynamics are all consistent with the implications of a precautionary motive for holding wealth.