Measuring Economic Downside Risk and Severity : Growth at Risk
Output collapses, and crises are a fact of life. Severe economic downturns occur periodically, and have grave consequences on the poor. The authors propose a new measurement for economic downside risk, and severity: Growth at risk. Similar to the c...
| Main Authors: | , |
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| Format: | Policy Research Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2014
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2001/09/1614735/measuring-economic-downside-risk-severity-growth-risk http://hdl.handle.net/10986/19554 |
| Summary: | Output collapses, and crises are a fact
of life. Severe economic downturns occur periodically, and
have grave consequences on the poor. The authors propose a
new measurement for economic downside risk, and severity:
Growth at risk. Similar to the concept of Value at Risk in
finance, Growth at Risk summarizes the expected maximum
economic downturn over a target horizon at a given
confidence level. After providing a taxonomy of growth
risks, the authors construct a panel data, set on Growth at
Risk for 84 countries, over the period 1980-98. On average,
different regional groups experience very distinct Growth at
Risk patterns over time. 1) Non-OECD countries experience a
higher downturn risk, while OECD countries' downturn
risks for both big, and small recessions are the lowest
among all groups. 2) East Asia countries, which had been
growing faster, had a high Growth at Risk for big downturns,
at around six percent, and it rose dramatically at the end
of the 1990s. 3) Latin America, and Sub-Saharan Africa also
maintained high Growth at Risk for both big, and small
recessions through 1980-98. But for Latin America, Growth at
Risk for big recessions declined in the 1990s. The authors
then investigate the relationship between downside risks,
and long-term average growth in a cross-country analysis.
They find that higher perceived levels of downside growth
risk, seem to be negatively associated with long-term
growth. When a country's perceived level of downside
growth risk is relatively high, both domestic, and foreign
investors might be deterred from making long-term
investments in the country, and instead invest elsewhere.
The results suggest that prudent, and consistent pursuit of
socioeconomic, and political stability, contributes to
long-term growth, and that risk management in a broader
sense, should be a vital part of the pro-growth, and poverty
reduction strategy. |
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