A Sensitivity Analysis on the Economic Vulnerability-Growth Nexus: Theory and Practice

This paper performs a sensitivity analysis of the effects of the Economic Vulnerability Index (EVI) on economic growth both theoretically and empirically. The first part uses Continuous Time Stochastic Optimal Control techniques to build a stochastic endogenous growthmodel which illustrates that an increase in Economic Vulnerability reduces the growth rate in the Economy. The second part employs the new Dynamic Common Correlated Effects Estimator for Heterogeneous Cross-Sectionally Dependent Dynamic Panels Data to empirically undertake the sensitivity analysis of the impacts of the Economic Vulnerability Index on growth. To this end, we build many Economic Vulnerability Indices by changing how its components enter its definition according to a wide range of possible scenarios.