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Growth and Risk: Methodology and Micro Evidence

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  • Chris Elbers

    (Free University Amsterdam)

  • Jan Willem Gunning

    (Free University Amsterdam)

  • Bill Kinsey

    (Free University Amsterdam)

Abstract

There has been a revival of interest in the effect of risk on economic growth. We quantify both ex ante and ex post effects of risk using a stochastic version of the Ramsey model. We develop a simulation-based econometric methodology which allows us to estimate the model in the structural form suggested by theory. The methodology is applied to micro data from a remarkable long-running panel data set for rural households in Zimbabwe. We find that risk substantially reduces growth: in the ergodic distribution the mean (across households) capital stock is 46% lower than in the absence of risk. About two-thirds of the impact of risk is due to the ex ante effect (i.e. the behavioral response to risk) which is usually not taken into account in policy design. Our results suggest that the e¤ectiveness of policy interventions which reduce exposure to shocks or help households in risk management may be seriously underestimated.

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Bibliographic Info

Paper provided by EconWPA in its series Development and Comp Systems with number 0408014.

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Length: 34 pages
Date of creation: 13 Aug 2004
Date of revision:
Handle: RePEc:wpa:wuwpdc:0408014

Note: Type of Document - pdf; pages: 34
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Web page: http://128.118.178.162

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Keywords: Farm household models; stochastic Ramsey growth models; estimation by simulation.;

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References

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  1. Deaton, Angus, 1991. "Saving and Liquidity Constraints," Econometrica, Econometric Society, vol. 59(5), pages 1221-48, September.
  2. Pierre-Olivier Gourinchas & Jonathan A. Parker, 2001. "The Empirical Importance of Precautionary Saving," American Economic Review, American Economic Association, vol. 91(2), pages 406-412, May.
  3. Chris Elbers & Jan Willem Gunning, 2004. "Growth Regressions and Economic Theory," GE, Growth, Math methods 0408001, EconWPA.
  4. Per Krusell & Anthony A. Smith & Jr., 1998. "Income and Wealth Heterogeneity in the Macroeconomy," Journal of Political Economy, University of Chicago Press, vol. 106(5), pages 867-896, October.
  5. Christopher D. Carroll, 1997. "Death to the Log-Linearized Consumption Euler Equation! (And Very Poor Health to the Second-Order Approximation)," NBER Working Papers 6298, National Bureau of Economic Research, Inc.
  6. Levhari, David & Srinivasan, T N, 1969. "Optimal Savings under Uncertainty," Review of Economic Studies, Wiley Blackwell, vol. 36(106), pages 153-63, April.
  7. Paul Collier & Jan Willem Gunning, 1997. "Explaining African economic performance," CSAE Working Paper Series 1997-02.2, Centre for the Study of African Economies, University of Oxford.
  8. Per Krusell & Anthony A. Smith, Jr., . "On the Welfare Effects of Eliminating Business Cycles," GSIA Working Papers 243, Carnegie Mellon University, Tepper School of Business.
  9. Robert E. Lucas Jr., 2003. "Macroeconomic Priorities," American Economic Review, American Economic Association, vol. 93(1), pages 1-14, March.
  10. Chris Elbers & Jan Willem Gunning, 2004. "Estimating Vulnerability," Development and Comp Systems 0408015, EconWPA.
  11. Bliss, Christopher, 1999. "Galton's Fallacy and Economic Convergence," Oxford Economic Papers, Oxford University Press, vol. 51(1), pages 4-14, January.
  12. Binder, Michael & Pesaran, M Hashem, 1999. " Stochastic Growth Models and Their Econometric Implications," Journal of Economic Growth, Springer, vol. 4(2), pages 139-83, June.
  13. Chris Elbers & Jan Willem Gunning, 2002. "Growth Regression and Economic Theory," Tinbergen Institute Discussion Papers 02-034/2, Tinbergen Institute.
  14. Jan Willem Gunning & John Hoddinott & Bill Kinsey & Trudy Owens, 1999. "Revisiting forever gained: income dynamics in the resettlement areas of Zimbabwe," CSAE Working Paper Series 1999-14, Centre for the Study of African Economies, University of Oxford.
  15. Jan Willem Gunning & John Hoddinott & Bill Kinsey & Trudy Owens, 2000. "Revisiting forever gained: Income dynamics in the resettlement areas of Zimbabwe, 1983-96," Journal of Development Studies, Taylor & Francis Journals, vol. 36(6), pages 131-154.
  16. William Easterly & Michael Kremer & Lant Pritchett & Lawrence H. Summers, 1993. "Good Policy or Good Luck? Country Growth Performance and Temporary Shocks," NBER Working Papers 4474, National Bureau of Economic Research, Inc.
  17. Binder, M. & Pesaran, M.H., 1996. "Stochastic Growth," Cambridge Working Papers in Economics 9615, Faculty of Economics, University of Cambridge.
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