Growth and Risk: Methodology and Micro Evidence

Research output: Working paperProfessional

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. This is, we believe, the first micro-based estimate of the effect of shocks on growth. 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 effectiveness of policy interventions which reduce exposure to shocks or help households in risk man!agement may be seriously underestimated.
Original languageEnglish
Place of PublicationAmsterdam
PublisherTinbergen Instituut
Publication statusPublished - 2003

Publication series

NameDiscussion paper TI
No.03-068/2

Fingerprint

Methodology
Household
Policy intervention
Capital stock
Micro data
Ramsey model
Economic growth
Zimbabwe
Panel data
Behavioral response
Simulation
Econometric methodology
Rural households
Policy design

Cite this

Elbers, C., Gunning, J. W., & Kinsey, B. (2003). Growth and Risk: Methodology and Micro Evidence. (Discussion paper TI; No. 03-068/2). Amsterdam: Tinbergen Instituut.
Elbers, Chris ; Gunning, Jan Willem ; Kinsey, Bill. / Growth and Risk: Methodology and Micro Evidence. Amsterdam : Tinbergen Instituut, 2003. (Discussion paper TI; 03-068/2).
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Elbers, C, Gunning, JW & Kinsey, B 2003 'Growth and Risk: Methodology and Micro Evidence' Discussion paper TI, no. 03-068/2, Tinbergen Instituut, Amsterdam.

Growth and Risk: Methodology and Micro Evidence. / Elbers, Chris; Gunning, Jan Willem; Kinsey, Bill.

Amsterdam : Tinbergen Instituut, 2003. (Discussion paper TI; No. 03-068/2).

Research output: Working paperProfessional

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AB - 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. This is, we believe, the first micro-based estimate of the effect of shocks on growth. 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 effectiveness of policy interventions which reduce exposure to shocks or help households in risk man!agement may be seriously underestimated.

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Elbers C, Gunning JW, Kinsey B. Growth and Risk: Methodology and Micro Evidence. Amsterdam: Tinbergen Instituut. 2003. (Discussion paper TI; 03-068/2).