Effects of Transitory Shocks to Aggregate Output on Consumption in Poor Countries

55 Pages Posted: 24 Sep 2013

See all articles by Markus Brückner

Markus Brückner

National University of Singapore (NUS)

Mark Gradstein

Ben-Gurion University of the Negev - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR); World Bank - Development Research Group (DECRG)

Date Written: September 2013

Abstract

This paper provides instrumental variables estimates of the response of aggregate private consumption to transitory output shocks in poor countries. To identify exogenous, unanticipated, idiosyncratic and transitory variations in national output we use year-to-year variations in rainfall as an instrumental variable in a panel of 39 sub-Saharan African countries during the period 1980-2009. Our estimates yield a marginal propensity to consume out of transitory output of around 0.2. To explain this result we show, using instrumental variables techniques, that there is a significant negative effect of transitory output shocks on net current transfers and a significant positive and quantitatively large effect on the trade balance. An important implication is that frictions to private financial flows do not necessarily imply large effects of transitory shocks to aggregate output on private consumption in poor countries.

Keywords: Consumption, International Capital Flows, Net Current Transfers, Permanent Income Hypothesis, Risk Sharing, Transitory Output Shocks

JEL Classification: E21, F32, F35, F41, O55

Suggested Citation

Brückner, Markus and Gradstein, Mark, Effects of Transitory Shocks to Aggregate Output on Consumption in Poor Countries (September 2013). CEPR Discussion Paper No. DP9658, Available at SSRN: https://ssrn.com/abstract=2329792

Markus Brückner (Contact Author)

National University of Singapore (NUS) ( email )

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Mark Gradstein

Ben-Gurion University of the Negev - Department of Economics ( email )

Beer-Sheva 84105
Israel
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+97 2 8647 2941 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

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Centre for Economic Policy Research (CEPR)

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World Bank - Development Research Group (DECRG)

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