Business Cycles, Economic Crises, and the Poor : Testing for Asymmetric Effects

Analysis of data for Brazil suggests that poverty responds asymmetrically to output shocks, showing less tendency to fall in response to a positive shock when the economy is initially in a downturn.Agenor examines whether output contractions associated with cyclical output fluctuations and economic crises have an asymmetric effect on poverty. He identifies four potential sources of asymmetry: expectations and confidence factors, credit rationing at the firm level (induced by either adverse selection problems or negative shocks to net worth), borrowing constraints at the household level, and the quot;labor hoardingquot; hypothesis. He also identifies some testable implications of these alternative explanations.The author then proposes a vector autoregression technique (involving the detrended components of real output, the unemployment rate, real wages, and the poverty rate) to test whether the initial cyclical position of the economy, and the size of the initial drop in the output gap in a downturn, matter in assessing the extent to which output shocks affect poverty. He applies the technique to Brazil, using annual data for 1981-99. The results indicate that poverty responds asymmetrically to output shocks, showing less sensitivity when the economy is initially in a downturn.This paper - a product of the Economic Policy and Poverty Reduction Division, World Bank Institute - is part of a larger effort in the institute to analyze the impact of macroeconomic adjustment on poverty. The author may be contacted at pagenor@worldbank.org