Short-Lived Shocks with Long-Lived Impacts? Household Income Dynamics in a Transition Economy

27 Pages Posted: 20 Apr 2016

See all articles by Martin Ravallion

Martin Ravallion

Georgetown University

Michael Lokshin

World Bank - Development Research Group (DECRG); National Research University Higher School of Economics

Date Written: October 1, 2000

Abstract

In theory it is possible that a vulnerable household will never recover from a sufficiently large but short-lived shock to its income - which could explain the persistent poverty that has emerged in many transition economies. But this study for Hungary shows that, in general, households bounce back from transient shocks, although not rapidly.

In theory it is possible that the persistent poverty that has emerged in many transition economies is attributable to underlying nonconvexities in the dynamics of household incomes - such that a vulnerable household will never recover from a sufficiently large but short-lived shock to its income. This happens when there are multiple equilibria in household incomes, such that two households with the same characteristics can have different incomes in the long run.

To test the theory, Lokshin and Ravallion estimate a dynamic panel data model of household incomes with nonlinear dynamics and endogenous attrition. Their estimates using data for Hungary in the 1990s exhibit nonlinearity in the income dynamics.

The authors find no evidence of multiple equilibria. In general, households bounce back from transient shocks, although the process is not rapid.

This paper - a product of Poverty and Human Resources, Development Research Group - is part of a larger effort in the group to understand household - level vulnerability to shocks. The authors may be contacted at mlokshin@worldbank.org or mravallion@worldbank.org.

Suggested Citation

Ravallion, Martin and Lokshin, Michael, Short-Lived Shocks with Long-Lived Impacts? Household Income Dynamics in a Transition Economy (October 1, 2000). Available at SSRN: https://ssrn.com/abstract=632529

Martin Ravallion (Contact Author)

Georgetown University ( email )

Washington, DC 20057
United States

Michael Lokshin

World Bank - Development Research Group (DECRG) ( email )

1818 H. Street, N.W.
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Washington, DC 20433
United States
202-473-1772 (Phone)
202-522-1153 (Fax)

HOME PAGE: http://econ.worldbank.org/staff/mlokshin

National Research University Higher School of Economics

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Moscow, Moscow 119017
Russia

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