Constructing a Positive Shock: Growth Through the Lens of Option Pricing

Mehmet Cangul

No 2023/152, IMF Working Papers from International Monetary Fund

Abstract: Low-income economies face negative shocks whose frequency and disproportionate impact overcome growth trajectories, producing a negative drift. COVID-19 was the latest such episode. To escape this negative drift, and build a durable recovery, there is a need for a counter-balancing force: to construct a positive shock. Growth is realized through decisions that fall under two categories, routine and non-linear. While routine decisions modify existing economic behavior along the same path, non-linear decisions describe riskier options that involve transformation. Option pricing theory can be useful to describe the latter, and construct the positive shock required to escape the negative drift.

Keywords: positive shock; option pricing growth model; escape speed; growth model; option pricing theory; routine decision; riskier option; Asset prices; Return on investment; COVID-19 (search for similar items in EconPapers)
Pages: 27
Date: 2023-07-28
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