In economics a shock is an unexpected or unpredictable event that affects an economy, either positively or negatively. Technically, it refers to an unpredictable change in exogenous factors -- that is, factors unexplained by economics -- which may have an impact on endogenous economic variables.
The response of economic variables, like output and employment, at the time of the shock and at subsequent times, is called an impulse response function.[1]
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Types of shocks
If the shock is due to constrained supply it is called a supply shock and usually results in price increases for a particular product. A technology shock is the kind resulting from a technological development that affects productivity.
Shocks can also be produced when accidents or disasters occur. The 2008 Western Australian gas crisis resulting from a pipeline explosion at Varanus Island is one example.
Role of shocks
Resiliance to such events depends on general preparedness, economic policy, existing infrastructure and effective emergency management planning. The use of floating exchange rates has been promoted as a way to dampen the effects of economic shocks.
Milton Friedman, a prominent economist, has argued that financial shocks are routine and that government actions may hinder recovery through poor fiscal policy. Naomi Klein, in her book The Shock Doctrine, argues that the shocks Friedman refers to are enacted during times of widespread social duress, allowing political groups to initiate what would otherwise be unpopular policies (such as Augusto Pinochet's rise to power and rule in Chile, the creation of the Patriot Act after the September 11 attacks, or the rise to power of insurgents in Iraq during the 2003 Iraq War).
See also
- Impulse response function
- Vector autoregression
- Dynamic stochastic general equilibrium
- Exogenous
- Supply shock
- Demand shock
- Oil crisis
- Shock therapy
- Social risk management
- The Shock Doctrine
References
- ^ Helmut Lütkepohl (2008), 'Impulse response function'. The New Palgrave Dictionary of Economics, 2nd. ed.
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