Measuring Economic Vulnerability: A Structural Equation Modeling Approach
Macroeconomic vulnerability is currently measured by the United Nations through a weighted average of eight variables related to exposure to shocks, and frequency of shocks, known as Economic Vulnerability Index (EVI). In this paper we propose to extend this measure by taking into account additional variables related to resilience, i.e., the ability of a country to recover after a shock. Since vulnerability can be considered as a latent variable, we explore the possibility of using the Structural Equation Model approach as an alternative to an index based on arbitrary weights. Using data from a panel of 98 countries over 19 years, we test our results with respect to the ability of the indices based on weighted averages, or on the SEM, in explaining the growth rate in real GDP per capita.
KeywordsHierarchical component model Partial least squares Structural equation modeling Vulnerability index