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HLEG thematic workshop on measuring economic, social and environmental resilience, Daniele Terlizzese

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This document discusses different approaches to measuring economic resilience. It notes that while resilience requires some redundancy which is inefficient, it also brings out an interesting trade-off between redundancy and efficiency. The document then evaluates the OECD's proposed measure of the "usefulness" of indicators for assessing resilience. It finds the OECD measure is similar but not identical to a more standard expected loss approach. It also discusses the OECD using quantile regressions to assess the impact of different factors on the tails of the GDP distribution, but notes concerns about identifying causal effects and justifying pooling across countries and periods.

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How to measure the resilience of economic systems? Comments by Daniele Terlizzese (EIEF) Strategic Forum, 2015 Measuring Economic, Social and Environmental Resilience
Schizophrenic comments On the one hand, some skepticism on the concept of economic resilience On the other hand, some nitty-gritty details on the empirical approach (OECD; too late for Philipp!) Outline
Shocks happen. An efficient economy adapts in a way that cannot be improved for everybody Does a resilient economy do something else? Is resilience an additional requirement? If shocks are the ¡°usual suspect¡± (only big), resilience is just a different name for efficient More useful insights if we focus on ¡°unusual¡± shocks: natural disasters unforeseen contingencies Is resilience a useful concept?
The economic system is not ¡°designed¡± to deal with either kind of shocks, as they are: either outside the realm of economics, or unamenable to standard mechanism design In both cases resilience seems to require idle capacity, redundancy But redundancy is ex-ante inefficient ¡ú resilience brings out an interesting trade-off Redundancy vs. Efficiency
Excessive leverage, excessive maturity mismatches, excessive debt¡­excessive relative to what? The analysis lacks a clear benchmark. A (negative) shock would impose a cost even to a fully efficient economy How much larger is the cost actually borne? Why is it larger? What are the market failures? Distributive concerns? Need for a structural model How to detect (lack of) resilience
OECD proposes a measure of ¡°usefulness¡± of an indicator w ?? ?? = min(Pr ?? ??, Pr ??? 1 ? ?? ) ? ???????? ?? ?? ?? ???? ?????? ???????? (??Pr(??) Pr(?? = 0|??) ????(???????? ?? ??????????) + 1 ? ? Pr(???) Pr ?? = 1 ??? ???? ???????? ???? ?????????? ???????? ?? ?? ?? ???? ???????? ) Not standard (why should PM be concerned with T1 and T2 errors per se, rather than with actions?) Compare with a more standard approach Usefulness of indicators
Let ?? 1 = ???????????? ?? ?? ?? Pr ?? ?? = 1 + ?? ?? ??? Pr ??? ?? = 1 and ?? 0 = ????????????{?? ?? ?? Pr ?? ?? = 0 + ?? ?? ??? Pr ???|?? = 0 } The standard definition of the minimal expected loss from the use of w is: Pr ?? = 1 [?? ?? 1 ?? Pr ?? ?? = 1 + ?? ?? 1 ??? Pr ???|?? = 1 ] + Pr ?? = 0 [?? ?? 0 ?? Pr ?? ?? = 0 + ?? ?? 0 ??? Pr ???|?? = 0 ] The loss from the use of w (1)
Assume/normalize ?? ??(1) ?? = ?? ??(0) ??? = 0 (with l.o.g.) then the loss becomes: Pr ?? = 1 [?? ?? 1 ??? Pr ???|?? = 1 ] + Pr ?? = 0 [?? ?? 0 ?? Pr ?? ?? = 0 ] = ?? ?? 1 ??? Pr ?? = 1, ??? + ?? ?? 0 ?? Pr(?? = 0, ??) Compare this with the OECD formulation: 1 ? ? Pr(?C)Pr ?? = 1 ??? + ?? Pr ?? Pr ?? = 0 ?? = 1 ? ? Pr(?? = 1, ???) + ??Pr(?? = 0, ??) Similar! But in general not true that ?? ?? 1 ??? + ?? ?? 0 ?? = 1 The loss from the use of w (2)
Let ??? = ???????????? ?? ?? ?? Pr(??) + ?? ?? ??? Pr(???) Then the standard definition of the minimal expected loss when w is not used is: ?? ??? ?? Pr(??) + ?? ??? ??? Pr(???) Suppose instead that the PM, when not using w, chooses either ???? or ????? , where ???? = ???????????? ??(??|??) and ????? = ???????????? ??(??|???). The loss if w is not used
Then the minimal expected loss would be either Pr C ?? ???? ?? + Pr(?C) ?? ???? ??? or Pr C ?? ????? ?? + Pr(?C) ?? ????? ??? If we assume that ?? ???? ?? = ?? ????? ??? = 0 (with l.o.g.) the minimal expected loss would be min(Pr C ?? ????? ?? , Pr(?C) ?? ???? ??? ) This is similar to the OECD formulation: min(Pr ?? ??, Pr ??? 1 ? ?? ). But: (i) assumes a ?bang-bang? behavior of PM; (ii) ?? ????? ?? and ?? ???? ??? do not add up to 1; (iii) ?? ????? ?? ¡Ù ?? ?? 0 ?? and ?? ???? ??? ¡Ù ?? ?? 1 ??? The loss if w is not used (2)
Recent strand in OECD analysis: assess the impact of different factors on the tails of the GDP distribution Quantile regressions are a useful and natural tool for this, and are more robust to outliers (but outliers might contain a lot of info on the tails) Two concerns: ? Correlation, not causal effect. How to identify the latter? ? Pooling across many countries and many periods might not be justified Quantile regressions
HLEG thematic workshop on measuring economic, social and environmental resilience, Daniele Terlizzese

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HLEG thematic workshop on measuring economic, social and environmental resilience, Daniele Terlizzese

  • 1. How to measure the resilience of economic systems? Comments by Daniele Terlizzese (EIEF) Strategic Forum, 2015 Measuring Economic, Social and Environmental Resilience
  • 2. Schizophrenic comments On the one hand, some skepticism on the concept of economic resilience On the other hand, some nitty-gritty details on the empirical approach (OECD; too late for Philipp!) Outline
  • 3. Shocks happen. An efficient economy adapts in a way that cannot be improved for everybody Does a resilient economy do something else? Is resilience an additional requirement? If shocks are the ¡°usual suspect¡± (only big), resilience is just a different name for efficient More useful insights if we focus on ¡°unusual¡± shocks: natural disasters unforeseen contingencies Is resilience a useful concept?
  • 4. The economic system is not ¡°designed¡± to deal with either kind of shocks, as they are: either outside the realm of economics, or unamenable to standard mechanism design In both cases resilience seems to require idle capacity, redundancy But redundancy is ex-ante inefficient ¡ú resilience brings out an interesting trade-off Redundancy vs. Efficiency
  • 5. Excessive leverage, excessive maturity mismatches, excessive debt¡­excessive relative to what? The analysis lacks a clear benchmark. A (negative) shock would impose a cost even to a fully efficient economy How much larger is the cost actually borne? Why is it larger? What are the market failures? Distributive concerns? Need for a structural model How to detect (lack of) resilience
  • 6. OECD proposes a measure of ¡°usefulness¡± of an indicator w ?? ?? = min(Pr ?? ??, Pr ??? 1 ? ?? ) ? ???????? ?? ?? ?? ???? ?????? ???????? (??Pr(??) Pr(?? = 0|??) ????(???????? ?? ??????????) + 1 ? ? Pr(???) Pr ?? = 1 ??? ???? ???????? ???? ?????????? ???????? ?? ?? ?? ???? ???????? ) Not standard (why should PM be concerned with T1 and T2 errors per se, rather than with actions?) Compare with a more standard approach Usefulness of indicators
  • 7. Let ?? 1 = ???????????? ?? ?? ?? Pr ?? ?? = 1 + ?? ?? ??? Pr ??? ?? = 1 and ?? 0 = ????????????{?? ?? ?? Pr ?? ?? = 0 + ?? ?? ??? Pr ???|?? = 0 } The standard definition of the minimal expected loss from the use of w is: Pr ?? = 1 [?? ?? 1 ?? Pr ?? ?? = 1 + ?? ?? 1 ??? Pr ???|?? = 1 ] + Pr ?? = 0 [?? ?? 0 ?? Pr ?? ?? = 0 + ?? ?? 0 ??? Pr ???|?? = 0 ] The loss from the use of w (1)
  • 8. Assume/normalize ?? ??(1) ?? = ?? ??(0) ??? = 0 (with l.o.g.) then the loss becomes: Pr ?? = 1 [?? ?? 1 ??? Pr ???|?? = 1 ] + Pr ?? = 0 [?? ?? 0 ?? Pr ?? ?? = 0 ] = ?? ?? 1 ??? Pr ?? = 1, ??? + ?? ?? 0 ?? Pr(?? = 0, ??) Compare this with the OECD formulation: 1 ? ? Pr(?C)Pr ?? = 1 ??? + ?? Pr ?? Pr ?? = 0 ?? = 1 ? ? Pr(?? = 1, ???) + ??Pr(?? = 0, ??) Similar! But in general not true that ?? ?? 1 ??? + ?? ?? 0 ?? = 1 The loss from the use of w (2)
  • 9. Let ??? = ???????????? ?? ?? ?? Pr(??) + ?? ?? ??? Pr(???) Then the standard definition of the minimal expected loss when w is not used is: ?? ??? ?? Pr(??) + ?? ??? ??? Pr(???) Suppose instead that the PM, when not using w, chooses either ???? or ????? , where ???? = ???????????? ??(??|??) and ????? = ???????????? ??(??|???). The loss if w is not used
  • 10. Then the minimal expected loss would be either Pr C ?? ???? ?? + Pr(?C) ?? ???? ??? or Pr C ?? ????? ?? + Pr(?C) ?? ????? ??? If we assume that ?? ???? ?? = ?? ????? ??? = 0 (with l.o.g.) the minimal expected loss would be min(Pr C ?? ????? ?? , Pr(?C) ?? ???? ??? ) This is similar to the OECD formulation: min(Pr ?? ??, Pr ??? 1 ? ?? ). But: (i) assumes a ?bang-bang? behavior of PM; (ii) ?? ????? ?? and ?? ???? ??? do not add up to 1; (iii) ?? ????? ?? ¡Ù ?? ?? 0 ?? and ?? ???? ??? ¡Ù ?? ?? 1 ??? The loss if w is not used (2)
  • 11. Recent strand in OECD analysis: assess the impact of different factors on the tails of the GDP distribution Quantile regressions are a useful and natural tool for this, and are more robust to outliers (but outliers might contain a lot of info on the tails) Two concerns: ? Correlation, not causal effect. How to identify the latter? ? Pooling across many countries and many periods might not be justified Quantile regressions