High Consumption Volatility Research Articles

The impact of air pollution on household vulnerability to poverty: An empirical study from household data in China

Understanding the relationship between air pollution and poverty is essential for improving livelihoods and fostering common prosperity. While existing studies have concentrated on the impact of extreme climate and natural disasters on poverty, the adverse effects of air pollution are neglected. Using the China Family Panel Studies (CFPS) from 2016 to 2018, this study investigates air pollution's effect on household vulnerability to poverty, including the mechanisms and heterogeneity. Results shows that air pollution significantly heightens household vulnerability to poverty. This effect stems from air pollution lowering incomes and increasing healthcare burden. Heterogeneity analysis shows that air pollution negatively impacts households with low wealth, poorly educated, weak social networks, and those in developing, non-coastal, and high-terrain cities. Furthermore, air pollution more severely affects households with high consumption volatility and low wealth compared to those with low vulnerability. We also discover that the adverse effects of air pollution on household vulnerability to poverty diminish with increased physical capital. Local governments are encouraged to intensify efforts in reducing emissions through improved environmental regulations, protecting residents from pollution-induced harm.

Estimating household vulnerability to tropical cyclones: An investigation of tropical cyclone shocks in coastal villages of eastern India

In east-coast India, tropical cyclones are perennial phenomena. The conditions of rural coastal households remain precarious as they become vulnerable to poverty. The present study examines the vulnerability of the affected households to recurrent cyclones. The study is based on 504 sample households in selected coastal villages on the Indian east coast. We employ the three-step feasible generalized least-square (3FGLS) estimation in a multilevel model to get consistent and asymptotic efficient estimates of consumption and find their determinants. Similarly, we use the multilevel model to find the factors affecting the vulnerability of each household. We further decompose the estimated vulnerability into idiosyncratic and covariate, and poverty into chronic and transient. We also estimate the vulnerability severity and gap of the households. We find that the current poor are less than those at risk of becoming poor due to tropical cyclones. Fishing as the main occupation affects the most vulnerable population as they are exposed to high consumption volatility and poverty. Risk attitude forms an integral part of the coastal population, and risk-taker households are more vulnerable to cyclonic shocks. However, households with multiple sources of livelihood stay less vulnerable. Unlike other studies, we find covariate vulnerability almost equal to idiosyncratic vulnerability. From the policy perspective, we need to mitigate the covariate shocks by ex-ante mitigation interventions, which may help consumption smoothening for households having high consumption volatility. Households under chronic poverty need to be provided with social safety nets to protect themselves from falling into poverty traps.

An equilibrium model of the term structures of bonds and equities

We propose an equilibrium model of the term structures of bonds and equities, which has a similar descriptive ability to the reduced form model proposed by Lettau and Wachter (2011) (LW), and yet offers economic implications about preferences and consumption dynamics. The key is to let the parameters of recursive utility depend on state variables of the economy and replicate the stochastic discount factor specified by LW. We show that the model can explain the stylized facts about the various term structures, which, however, requires a high risk aversion, a high consumption volatility, or both. This tension can be alleviated by changing the parameters of the state-dependent preferences in our model.

Asset pricing with time varying pessimism and rare disasters

We incorporate time-varying consumption volatility in the representative-agent asset pricing model with generalized recursive smooth ambiguity preferences developed by Ju and Miao (2012). We calibrate the model to data on consumption and asset returns since the Great Depression period. Uncertainty aversion amplifies the perceived probability of the disastrous state coupled with high consumption volatility. We find that the model with time-varying volatility generates a high equity risk premium. When we impose the condition that no consumption disasters ever realized in simulated samples, the model with time-varying volatility can reproduce predictability of returns and non-predictability of consumption growth simultaneously, which are consistent with empirical findings.

Income inequality and sovereign default

In this paper, we study how income inequality matters for government borrowing and default decisions. We extend a standard endogenous sovereign debt default model to allow for heterogeneous agents and stochastic variability in the dispersion of income. We calibrate the model to match a number of stylized facts for Argentina. We show that (i) rising income inequality within a country increases the probability of default significantly; (ii) the effect of output shocks is larger than the effect of inequality shocks; (iii) the joint effect of these two shocks can generate a high default probability consistent with the Argentine data; (iv) the model can match the high volatility of consumption by the poor relative to the rich; and (v) more progressive income taxes lead to lower default risk.

The price of imported capital and consumption fluctuations in emerging economies

We study the role played by fluctuations in the price of imported capital in determining the behavior of consumption fluctuations in developing countries. For this, we decompose the price of imported capital into common and country-specific components, where the common component is the price of capital in the US. Empirically, we document that, in contrast to small industrialized countries, consumption in developing countries responds more than output to unexpected changes in the price of capital in the US. As such, fluctuations in the price of capital in the US contribute to a high volatility of consumption relative to that of output in developing countries. We then show that a small open-economy real business cycle model driven by fluctuations in the price of imported capital can account for the responses of consumption and output to innovations of the price of capital in the US and for the high relative volatility of consumption observed in developing country. Finally, confronting the model to the data, we further find that fluctuations in the price of capital in the US contribute substantially to fluctuations of consumption in countries that display a low volatility of output and a large relative volatility of consumption.

The Welfare Effects of Asset Means-Testing Income Support

This paper quantitatively determines the asset limit in income support programs which minimizes consumption volatility in a lifecycle model with incomplete markets and idiosyncratic earnings risk. An asset limit allows allocating transfers to those households with the highest utility gains from extra consumption. Moreover, it serves as substitute for history and age dependent taxation. However, a low limit provides incentives for high school dropouts to accumulate almost no wealth. Consequently, they miss self-insurance and suffer from high consumption volatility. For an unborn, these effects are optimally traded-off with an asset limit of $145000.

External Shocks and High Volatility in Consumption in Low‐Income Countries

According to the well‐known concept of consumption smoothing, the volatility of consumption is low even when income is volatile; this is confirmed by data from G7 countries. Surprisingly, however, consumption volatility in many low‐income countries is nontrivially higher than income volatility. Here I examine what causes high consumption volatility in low‐income countries. In general, volatile consumption makes consumers worse off. Therefore, understanding the causes of high consumption volatility can contribute to improving welfare in low‐income countries by suggesting measures to assist in the stabilization of consumption. Unlike much previous research, I focus on international factors when explaining high consumption volatility. The results suggest that external shocks, which are far more volatile in low‐income countries than in industrialized countries, strongly swing consumption. By capturing these mechanisms, the model I use successfully accounts for consumption volatility's differences between the sample low‐income country and sample industrialized country.

Labor, Output and Consumption in Business Cycle Models of Emerging Economies

Motivated by the fact that, over the business cycle, labor dynamics in emerging economies differ in nontrivial ways from those observed in developed economies, we assess the relative importance of trend shocks in emerging economies in the business cycle model of Aguiar and Gopinath (2007) when labor data is explicitly taken into account. We study Mexico and Canada as representatives of emerging and developed economies, respectively. We find for Mexico that, in the benchmark case with Cobb-Douglas preferences, the income effect on consumption of trend shocks is too strong, delivering countercyclical and counterfactual fluctuations in employment. The model faces a trade-off between, on the one hand, having sizeable growth shocks, thereby having a good match in terms of relatively high consumption volatility, and, on the other, having procyclical employment dynamics. This is remedied when both quasilinear preferences are assumed and the econometric identification strategy explicitly takes into consideration labor dynamics. In this case trend shocks continue to be relatively stronger in emerging economies. Additionally, we find that differences in labor dynamics across emerging and developing economies are associated with the relatively large informal labor sector in emerging economies. It is in this dimension, when trying to match the dynamics of formal employment, that we find less evidence supporting an important role of trend shocks as being the main driving force of business cycles in emerging economies.

Financial market participation and the developing country business cycle

Abstract I explore the implications of limited participation in financial markets on a standard small open economy business cycle model. Despite its parsimony, the limited participation model developed in this paper improves over the standard model in terms of explaining two important features of business cycle facts of developing countries: high volatility of consumption, and high negative correlation between the trade balance and output. Limited participation model is then used to inspect the effects of financial development and integration on macroeconomic volatility. Under a standard calibration, limited participation model leads to the conclusion that financial development and integration are associated with higher investment and output volatility. Effect of more participation on consumption volatility is dependent on the specification of the risk premium function.

Estimating Households Vulnerability to Idiosyncratic and Covariate Shocks: A Novel Method Applied in Madagascar

Households in developing countries are frequently hit by severe idiosyncratic and covariate shocks leading to high consumption volatility. A household’s currently observed poverty status might therefore not be a good indicator of the household’s general vulnerability to poverty. In the recent years, there has been an emerging literature on the concept and empirical analysis of vulnerability. But because of strong data requirements for vulnerability analysis and limited availability of panel and shock data for developing countries, static poverty analysis still dominates empirical vulnerability studies. In this paper, we propose a simple method to empirically assess the impact of idiosyncratic and covariate shocks on households’ vulnerability, which can be applied in a wide context as it relies on more commonly available cross-sectional or short panel data. We empirically illustrate our approach for Madagascar. We show that covariate shocks have a relatively higher impact on rural households, whereas idiosyncratic shocks have a relatively higher impact on urban households’ vulnerability.

Introduction: Globalization–Poverty Channels and Case Studies from Sub-Saharan Africa

In 2004 the United Nations University World Institute for Development Economics Research (UNU-WIDER) embarked on a large-scale research project on the ‘Impact of Globalization on the World’s Poor’ co-directed by Machiko Nissanke and Erik Thorbecke. The first conference was essentially conceptual in nature, meant to understand better the various mechanisms and channels through which globalization affects the poor either directly or indirectly. The other three conferences focused on each of the major regions of the developing world: Asia, Africa and Latin America. Theobjectivesofthisintroductionarethreefold:first,toreviewbrieflyhow the forces of globalization influence poverty in general; second, to describe and discuss the main transmission channels and mechanisms; and third to analyze the impact of globalization on Africa and present an overview of the six Africa case studies included in this issue. 1. The Impact of Globalization on the World’s Poor Globalization provides a strong potential for a major reduction in poverty in the developing world because it creates an environment conducive to fastereconomicgrowthandtransmissionofknowledge. 1 However,structural factors and policies within the world economy and national economies have impeded the full transmission of the benefits of the various channels of globalization for poverty reduction. In particular sub-Saharan Africa (SSA) hasbeenrelativelylessaffectedbytheforcesofglobalizationthanotherparts of the world. World income distribution continues to be very unequal and many poor countries particularly in Africa are stagnating. Moreover, there is much empirical evidence that openness contributes to more within-country