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How Big Are The Benefits of Economic Diversification?: Evidence from Earthquakes

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

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Length: 32 pages
Date of creation: 15 Mar 2005
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Handle: RePEc:imf:imfwpa:05/48

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Keywords: Consumption ; Exchange risk ; Credit ; Risk premium ; Export diversification ;

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This paper has been announced in the following NEP Reports: References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  2. Allan D. Brunner, 2002. "El Niño and World Primary Commodity Prices: Warm Water or Hot Air?," The Review of Economics and Statistics, MIT Press, vol. 84(1), pages 176-183, February. [Downloadable!] (restricted)
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  3. Jean Imbs & Romain Wacziarg, 2003. "Stages of Diversification," American Economic Review, American Economic Association, vol. 93(1), pages 63-86, March. [Downloadable!]
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  4. Sebnem Kalemli-Ozcan & Bent E. Sørensen & Oved Yosha, 2003. "Risk Sharing and Industrial Specialization: Regional and International Evidence," American Economic Review, American Economic Association, vol. 93(3), pages 903-918, June. [Downloadable!]
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  5. 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.
  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. [Downloadable!] (restricted)
  7. Saint-Paul, Gilles, 1992. "Technological choice, financial markets and economic development," European Economic Review, Elsevier, vol. 36(4), pages 763-781, May. [Downloadable!] (restricted)
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  8. Geert Bekaert & Campbell R. Harvey & Christian Lundblad, 2004. "Growth Volatility and Financial Liberalization," NBER Working Papers 10560, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  9. 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. [Downloadable!] (restricted)
  10. van Wincoop, Eric, 1999. "How big are potential welfare gains from international risksharing?," Journal of International Economics, Elsevier, vol. 47(1), pages 109-135, February. [Downloadable!] (restricted)
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  11. Krugman, Paul R., 1979. "Increasing returns, monopolistic competition, and international trade," Journal of International Economics, Elsevier, vol. 9(4), pages 469-479, November. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  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. [Downloadable!]
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