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The Persistence of Income Shocks: Evidence from Rural Indonesia


  • David Newhouse


This paper estimates the persistence of transient income shocks to farm households in rural Indonesia. Persistence is defined as the elasticity of a household's 1997 household per capita income with respect to its 1993 per capita income, controlling for time-invariant characteristics of the household. Local rainfall levels are used as an exogenous source of transitory variation in 1993 income. Four main conclusions emerge. First, roughly 30% of household income shocks remain after four years. Second, the persistence of negative and positive shocks is approximately equal; if anything, positive shocks last longer. Third, neither positive nor negative income shocks disproportionately affect poor households. Finally, measurement error in income and unobserved household heterogeneity are important sources of bias. These findings cast doubt on common arguments advocating public intervention to stabilize or redistribute income, and suggest that anti-poverty policy should address more permanent causes of household poverty. Copyright Blackwell Publishing Ltd 2005.

Suggested Citation

  • David Newhouse, 2005. "The Persistence of Income Shocks: Evidence from Rural Indonesia," Review of Development Economics, Wiley Blackwell, vol. 9(3), pages 415-433, August.
  • Handle: RePEc:bla:rdevec:v:9:y:2005:i:3:p:415-433

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    References listed on IDEAS

    1. Reinhart, Carmen M. & Vegh, Carlos A., 1995. "Nominal interest rates, consumption booms, and lack of credibility: A quantitative examination," Journal of Development Economics, Elsevier, vol. 46(2), pages 357-378, April.
    2. Allan Drazen & Elhanan Helpman, 1987. "Stabilization with Exchange Rate Management under Uncertainty," NBER Working Papers 2268, National Bureau of Economic Research, Inc.
    3. Blanchard, Olivier J, 1985. "Debt, Deficits, and Finite Horizons," Journal of Political Economy, University of Chicago Press, vol. 93(2), pages 223-247, April.
    4. Allan Drazen & Elhanan Helpman, 1987. "Stabilization with Exchange Rate Management," The Quarterly Journal of Economics, Oxford University Press, vol. 102(4), pages 835-855.
    5. Michael Mussa, 2002. "Argentina and the Fund: From Triumph to Tragedy," Peterson Institute Press: All Books, Peterson Institute for International Economics, number pa67, January.
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    Cited by:

    1. Korkeala, Outi & Newhouse, David & Duarte, Mafalda, 2009. "Distributional impact analysis of past climate variability in rural Indonesia," Policy Research Working Paper Series 5070, The World Bank.
    2. Walter Sosa-Escudero & Mariana Marchionni & Omar Arias, 2011. "Sources of Income Persistence: Evidence from Rural El Salvador," Journal of Income Distribution, Journal of Income Distribution, vol. 20(1), pages 3-28, March.
    3. Apata, T.G. & Olajorin, V., 2013. "Persistence of Small Farms and Associated Poverty Levels in Nigeria: Case for Commercialization of Small Farms," 2013 AAAE Fourth International Conference, September 22-25, 2013, Hammamet, Tunisia 160425, African Association of Agricultural Economists (AAAE).
    4. Naschold, Felix & Walker, Thomas F. & Barrett, Christopher B. & Osei, Robert, 2011. "Idiosyncratic shocks, risk management and welfare dynamics in rural Ghana," 2011 Annual Meeting, July 24-26, 2011, Pittsburgh, Pennsylvania 109646, Agricultural and Applied Economics Association.
    5. Naschold, Felix, 2016. "Getting ahead or falling behind? – The importance of households’ ability to manage idiosyncratic risk in rural Ghana," 2016 Annual Meeting, July 31-August 2, 2016, Boston, Massachusetts 235720, Agricultural and Applied Economics Association.
    6. Gabriella Berloffa & Francesca Modena, 2009. "Income Shocks, Coping Strategies, and Consumption Smoothing. An Application to Indonesian Data," Department of Economics Working Papers 0901, Department of Economics, University of Trento, Italia.
    7. Stefan Dercon & Joseph S. Shapiro, 2007. "Moving On, Staying Behind, Getting Lost: Lessons on poverty mobility from longitudinal data," Economics Series Working Papers GPRG-WPS-075, University of Oxford, Department of Economics.
    8. David I. Levine & Dean Yang, 2014. "The Impact of Rainfall on Rice Output in Indonesia," NBER Working Papers 20302, National Bureau of Economic Research, Inc.
    9. Berloffa, Gabriella & Modena, Francesca, 2013. "Income shocks, coping strategies, and consumption smoothing: An application to Indonesian data," Journal of Asian Economics, Elsevier, vol. 24(C), pages 158-171.
    10. Mangyo, Eiji, 2008. "Who benefits more from higher household consumption? The intra-household allocation of nutrients in China," Journal of Development Economics, Elsevier, vol. 86(2), pages 296-312, June.
    11. Tran, Van Q., 2015. "Household's coping strategies and recoveries from shocks in Vietnam," The Quarterly Review of Economics and Finance, Elsevier, vol. 56(C), pages 15-29.
    12. repec:bla:sajeco:v:85:y:2017:i:1:p:98-122 is not listed on IDEAS

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