2003年-世界发展银行全球_High_Consumption_Volatility___The_Impact_of_Natural_Disasters__40页_1mb

High Consumption Volatility: The Impact of Natural Disasters?

Core Content

This working paper by Philippe Auffret examines the high consumption volatility in the Caribbean region and its relationship with natural disasters and other macroeconomic shocks. The paper highlights that despite relatively high consumption growth, the Caribbean region experiences significantly higher consumption volatility compared to other regions globally, which negatively affects household welfare.

Main Points

1. Consumption Volatility in the Caribbean Region

• High Volatility: The Caribbean region has a much higher per capita consumption volatility than any other region in the world, even though its consumption growth is comparable to OECD countries and higher than most other regions.
• Impact on Welfare: Risk-averse individuals in the Caribbean prefer a stable consumption path, and are willing to forego a substantial portion of consumption growth to eliminate volatility.
• Certainty-Equivalent Growth: A representative Caribbean individual is willing to accept a certainty-equivalent consumption growth of 0.79% instead of 2.45% with a volatility of 0.0856. In contrast, Latin American individuals are only willing to give up 0.69% of consumption growth for similar volatility reduction.

2. Theoretical Framework

• General Equilibrium Model: Under the assumption of complete markets, individuals can trade risks to smooth consumption, but in reality, underdeveloped or ineffective risk management mechanisms lead to consumption volatility.
• Production Shocks: These shocks, whether domestic or external, can be transformed into consumption shocks due to inadequate risk management systems.
• Risk Management Mechanisms: The paper outlines two categories:
  • Risk-Reduction Mechanisms: Including risk identification, risk mitigation, and risk preparedness.
  • Risk-Coping Mechanisms: Including financial and insurance markets, and counter-cyclical policies.

3. Empirical Analysis

• Consumption Volatility Determinants:
  • Production Volatility: Accounts for about 40% of the variation in consumption volatility.
  • Financial and Insurance Depth: These mechanisms help reduce consumption volatility, each accounting for about one-fourth of the variation.
  • Economic Development: Explains about one-third of the variation in consumption volatility.
  • Country Size: Also explains about one-third of the variation in consumption volatility.
• Empirical Tests:
  • The paper uses regression analysis to test these determinants, with results showing that the remaining variables explain up to 60% of consumption volatility.
  • Financial and insurance depth proxies are not statistically significant due to multicollinearity, but the other variables (production volatility, economic development, and country size) are.

4. Impact of Natural Disasters

• Macroeconomic Effects:
  • Natural disasters lead to a substantial decline in output growth.
  • They also result in a significant drop in investment growth.
  • Consumption growth declines, but less severely than output and investment.
  • The current account of the balance of payments deteriorates.

5. International Risk-Sharing

• Welfare Implications: International risk-sharing can reduce consumption volatility, but it may also lead to a decline in consumption growth, which can reduce welfare in some cases.
• Example: A country with high and stable growth may not benefit from sharing risks with a country with low and volatile growth.

Key Information

• Data Source: The analysis uses data from the World Bank's SIMA database for the period 1960-97.
• Volatility Metrics: The paper uses a geometric Brownian motion model to define and measure consumption volatility, with the standard deviation of log consumption growth as the key metric.
• Empirical Findings:
  • The Caribbean region has the highest consumption volatility globally.
  • Consumption volatility is influenced by production shocks, financial and insurance mechanisms, economic development, and country size.
  • Natural disasters significantly impact macroeconomic variables, including output, investment, and the current account.

Summary of Volatility by Region and Country

Conclusion

The paper concludes that the Caribbean region's high consumption volatility is largely due to the lack of effective risk management mechanisms, which transform production shocks into consumption shocks. Natural disasters significantly impact macroeconomic stability, leading to reduced output and investment growth, and worsening the current account. The study underscores the need for improved financial and insurance systems to mitigate the effects of these shocks and enhance welfare.