DP9658 Effects of Transitory Shocks to Aggregate Output on Consumption in Poor Countries

Author(s): Markus Brückner, Mark Gradstein
Publication Date: September 2013
Keyword(s): Consumption, International Capital Flows, Net Current Transfers, Permanent Income Hypothesis, Risk Sharing, Transitory Output Shocks
JEL(s): E21, F32, F35, F41, O55
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=9658

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.