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How Big Are the Benefits of Economic Diversification? Evidence From Earthquakes

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  • Rodney Ramcharan

Abstract

Economic activity is risky. Returns across economic sectors can be highly variable, potentially causing costly adjustments to consumption. However, when returns are imperfectly correlated across sectors and insurance is unavailable, diversification can reduce the economic impact of shocks. Therefore, despite the well-known efficiency benefits from specialization, the risks of too little diversification have long been acknowledged. But how big are the benefits of diversification? This paper exploits the exogeneity and randomness of earthquakes to address this question. There is robust evidence that more specialized economies experience larger declines in consumption when earthquakes occur, and consistent with the insurance channel, the cost of specialization is smaller in more financially developed economies.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 05/48.

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Length: 32
Date of creation: 01 Mar 2005
Date of revision:
Handle: RePEc:imf:imfwpa:05/48

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Related research

Keywords: Exchange risk; Credit; Risk premium; Export diversification; earthquakes; earthquake; disasters; epidemiology of disasters; internet; geology; topography; earthquake intensity; earthquake spectra; land area; global coverage; geographic distribution; surveys; geological characteristics;

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References

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  1. Krugman, Paul R., 1979. "Increasing returns, monopolistic competition, and international trade," Journal of International Economics, Elsevier, vol. 9(4), pages 469-479, November.
  2. Eric van Wincoop, 1998. "How big are potential welfare gains from international risksharing?," Staff Reports 37, Federal Reserve Bank of New York.
  3. Obstfeld, Maurice, 1994. "Risk-Taking, Global Diversification, and Growth," American Economic Review, American Economic Association, vol. 84(5), pages 1310-29, December.
  4. Kalemli-Ozcan, Sebnem & Sorensen, Bent E. & Yosha, Oved, 2001. "Economic integration, industrial specialization, and the asymmetry of macroeconomic fluctuations," Journal of International Economics, Elsevier, vol. 55(1), pages 107-137, October.
  5. Sebnem Kalemli-Ozcan & Bent E. S�rensen & Oved Yosha, 1999. "Risk Sharing and Industrial Specialization: Regional and International Evidence," Working Papers 99-16, Brown University, Department of Economics.
  6. Paxson, Christina H, 1992. "Using Weather Variability to Estimate the Response of Savings to Transitory Income in Thailand," American Economic Review, American Economic Association, vol. 82(1), pages 15-33, March.
  7. Wacziarg, Romain & Imbs, Jean, 2000. "Stages of Diversification," Research Papers 1653, Stanford University, Graduate School of Business.
  8. Saint-Paul, G., 1990. "Technological Choice, Financial Markets and Economic Development," DELTA Working Papers 90-30, DELTA (Ecole normale supérieure).
  9. Brainard, William C. & Cooper, Richard N., 1968. "Uncertainty and Diversification in International Trade," Food Research Institute Studies, Stanford University, Food Research Institute, issue 03.
  10. Bekaert, Geert & Harvey, Campbell R. & Lundblad, Christian, 2006. "Growth volatility and financial liberalization," Journal of International Money and Finance, Elsevier, vol. 25(3), pages 370-403, April.
  11. Allan D. Brunner, 1998. "El Nino and world primary commodity prices: warm water or hot air?," International Finance Discussion Papers 608, Board of Governors of the Federal Reserve System (U.S.).
  12. Kemp, Murray C & Liviatan, Nissan, 1973. "Production and Trade Patterns under Uncertainty," The Economic Record, The Economic Society of Australia, vol. 49(126), pages 215-27, June.
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Cited by:
  1. Monica Escaleras & Nejat Anbarci & Charles Register, 2006. "Public Sector Corruption and Natural Disasters: A Potentially Deadly Interaction," Working Papers 06005, Department of Economics, College of Business, Florida Atlantic University, revised Aug 2006.
  2. Nicole Laframboise & Boileau Loko, 2012. "Natural Disasters," IMF Working Papers 12/245, International Monetary Fund.

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