How big are the benefits of economic diversification?
Subtitle: evidence from earthquakes
By: prepared by Rodney Ramcharan.
Contributors: International Monetary Fund. Research Dept.
Series: IMF working paper -- WP/05/48
Publisher: International Monetary Fund, Research Dept.
Published: 2005
Place of publication: Washington, D.C
Language: eng
Number of pages: 32
Subjects: Risk -- Econometric models.; Economic policy -- Econometric models.; Consumption (Economics) -- Econometric models.; Earthquakes -- Economic aspects.
Description: Economic activity is risky. Returns across economic sectors can be highly variable, potentially causing costly adjustments to consumption. However, when returns are imperfectly correlated across sectors and insurance is unavailable, diversification can reduce the economic impact of shocks. Therefore, despite the well-known efficiency benefits from specialization, the risks of too little diversification have long been acknowledged. But how big are the benefits of diversification? This paper exploits the exogeneity and randomness of earthquakes to address this question. There is robust evidence that more specialized economies experience larger declines in consumption when earthquakes occur, and consistent with the insurance channel, the cost of specialization is smaller in more financially developed economies.
Notes: "March 2005."

Includes bibliographical references (p. 16-17).

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