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

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  • Mehmet Cangul

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.

Suggested Citation

  • Mehmet Cangul, 2023. "Constructing a Positive Shock: Growth Through the Lens of Option Pricing," IMF Working Papers 2023/152, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2023/152
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