Knowing When You Do Not Know

Economists have long sought to predict how macroeconomic shocks will
affect individual welfare. Macroeconomic data and forecasts are easily
available when crises strike. But policy action requires not only
understanding the magnitude of a macro shock, but also identifying
which households or individuals are being hurt by (or benefit from) the
crisis.

A popular solution is to extrapolate the welfare impact of a shock
from the historical response of income or consumption poverty to
changes in output, by estimating an 'elasticity' of poverty to
growth. Although this method provides an estimate for the aggregate
poverty impact of a macro shock, it has limited value for analysts and
policymakers alike. Aggregate numbers are useful to capture the
attention of policymakers and the international community, but in the
absence of any information on who is affected and to what extent,
provide little guidance on what actions need to be taken.

This volume outlines a more comprehensive approach to the problem,
showcasing a microsimulation model, developed in response to demand
from World Bank staff working in countries and country governments in
the wake of the global financial crisis of 2008-09. Starting with the
idea of using simple macroeconomic projections as the 'macro
linkages' to a micro behavioral model built from household data,
the model was conceptualized, refined and tested in a diverse mix of
countries: Bangladesh, Philippines, Mexico, Poland and Mongolia. The
results fed into country policy dialogue and lending operations of Bank
teams, as well as various reports, research papers and briefs.