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Growth and Risk: Methodology and Micro Evidence

  • Chris Elbers

    (Free University Amsterdam)

  • Jan Willem Gunning

    (Free University Amsterdam)

  • Bill Kinsey

    (Free University Amsterdam)

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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File URL: http://128.118.178.162/eps/dev/papers/0408/0408014.pdf
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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
Contact details of provider: Web page: http://128.118.178.162

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  1. 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.
  2. repec:dgr:uvatin:2002034 is not listed on IDEAS
  3. 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.
  4. 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.
  5. 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.
  6. Chris Elbers & Jan Willem Gunning, 2004. "Estimating Vulnerability," Development and Comp Systems 0408015, EconWPA.
  7. Robert E. Lucas Jr., 2003. "Macroeconomic Priorities," American Economic Review, American Economic Association, vol. 93(1), pages 1-14, March.
  8. repec:dgr:uvatin:20020034 is not listed on IDEAS
  9. Deaton, Angus, 1991. "Saving and Liquidity Constraints," Econometrica, Econometric Society, vol. 59(5), pages 1221-48, September.
  10. 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.
  11. Levhari, David & Srinivasan, T N, 1969. "Optimal Savings under Uncertainty," Review of Economic Studies, Wiley Blackwell, vol. 36(106), pages 153-63, April.
  12. Jan Willem Gunning & Paul Collier, 1999. "Explaining African Economic Performance," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 64-111, March.
  13. Pierre-Olivier Gourinchas & Jonathan A. Parker, 2001. "The Empirical Importance of Precautionary Saving," NBER Working Papers 8107, National Bureau of Economic Research, Inc.
  14. Binder, M. & Pesaran, M.H., 1996. "Stochastic Growth," Cambridge Working Papers in Economics 9615, Faculty of Economics, University of Cambridge.
  15. Per Krusell & Anthony A. Smith, Jr., 1999. "On the Welfare Effects of Eliminating Business Cycles," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(1), pages 245-272, January.
  16. 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.
  17. Bliss, Christopher, 1999. "Galton's Fallacy and Economic Convergence," Oxford Economic Papers, Oxford University Press, vol. 51(1), pages 4-14, January.
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