IDEAS home Printed from https://ideas.repec.org/a/eee/jimfin/v73y2017ipap93-103.html
   My bibliography  Save this article

Flooded with debt

Author

Listed:
  • Klomp, Jeroen

Abstract

This study explores if natural disasters are able to trigger a sovereign debt default. Natural disasters make the debt of a country less sustainable as they worsen the public finances of a country. The main findings from our empirical analysis clearly indicate that large-scale natural disasters increase significantly the onset probability of a sovereign debt default by about three percentage-points. It turns out that particularly major earthquakes and storms raise the likelihood of a default as they create the most widespread damage reported worldwide. This will limit the debt servicing opportunities of a country in the future.

Suggested Citation

  • Klomp, Jeroen, 2017. "Flooded with debt," Journal of International Money and Finance, Elsevier, vol. 73(PA), pages 93-103.
    • Handle: RePEc:eee:jimfin:v:73:y:2017:i:pa:p:93-103
    DOI: 10.1016/j.jimonfin.2017.01.006
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0261560617300050
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jimonfin.2017.01.006?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. David Strömberg, 2007. "Natural Disasters, Economic Development, and Humanitarian Aid," Journal of Economic Perspectives, American Economic Association, vol. 21(3), pages 199-222, Summer.
    2. Healy, Andrew & Malhotra, Neil, 2009. "Myopic Voters and Natural Disaster Policy," American Political Science Review, Cambridge University Press, vol. 103(3), pages 387-406, August.
    3. Carmen M. Reinhart & Kenneth S. Rogoff & Miguel A. Savastano, 2003. "Debt Intolerance," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(1), pages 1-74.
    4. Eduardo Borensztein & Eduardo Cavallo & Patricio Valenzuela, 2009. "Debt Sustainability Under Catastrophic Risk: The Case for Government Budget Insurance," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 12(2), pages 273-294, September.
    5. Klomp, Jeroen, 2014. "Financial fragility and natural disasters: An empirical analysis," Journal of Financial Stability, Elsevier, vol. 13(C), pages 180-192.
    6. Alesina, Alberto & Tabellini, Guido, 1989. "External debt, capital flight and political risk," Journal of International Economics, Elsevier, vol. 27(3-4), pages 199-220, November.
    7. Lis, Eliza & Nickel, Christiane, 2009. "The impact of extreme weather events on budget balances and implications for fiscal policy," Working Paper Series 1055, European Central Bank.
    8. Noy, Ilan & Nualsri, Aekkanush, 2011. "Fiscal storms: public spending and revenues in the aftermath of natural disasters," Environment and Development Economics, Cambridge University Press, vol. 16(1), pages 113-128, February.
    9. Mr. Axel Schimmelpfennig & Nouriel Roubini & Paolo Manasse, 2003. "Predicting Sovereign Debt Crises," IMF Working Papers 2003/221, International Monetary Fund.
    10. Loayza, Norman V. & Olaberría, Eduardo & Rigolini, Jamele & Christiaensen, Luc, 2012. "Natural Disasters and Growth: Going Beyond the Averages," World Development, Elsevier, vol. 40(7), pages 1317-1336.
    11. Yang Dean, 2008. "Coping with Disaster: The Impact of Hurricanes on International Financial Flows, 1970-2002," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 8(1), pages 1-45, June.
    12. Felbermayr, Gabriel & Gröschl, Jasmin, 2014. "Naturally negative: The growth effects of natural disasters," Journal of Development Economics, Elsevier, vol. 111(C), pages 92-106.
    13. Martin Gassebner & Alexander Keck & Robert Teh, 2010. "Shaken, Not Stirred: The Impact of Disasters on International Trade," Review of International Economics, Wiley Blackwell, vol. 18(2), pages 351-368, May.
    14. Barro, Robert J, 1979. "On the Determination of the Public Debt," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 940-971, October.
    15. Eduardo Cavallo & Sebastian Galiani & Ilan Noy & Juan Pantano, 2013. "Catastrophic Natural Disasters and Economic Growth," The Review of Economics and Statistics, MIT Press, vol. 95(5), pages 1549-1561, December.
    16. Sachs, Jeffrey D & Warner, Andrew M, 1997. "Fundamental Sources of Long-Run Growth," American Economic Review, American Economic Association, vol. 87(2), pages 184-188, May.
    17. Martin Melecky & Claudio Raddatz, 2015. "Fiscal Responses after Catastrophes and the Enabling Role of Financial Development," The World Bank Economic Review, World Bank, vol. 29(1), pages 129-149.
    18. Bandiera, Luca & Cuaresma, Jesus Crespo & Vincelette, Gallina A., 2010. "Unpleasant surprises : sovereign default determinants and prospects," Policy Research Working Paper Series 5401, The World Bank.
    19. Ouattara, Bazoumana & Strobl, Eric, 2013. "The fiscal implications of hurricane strikes in the Caribbean," Ecological Economics, Elsevier, vol. 85(C), pages 105-115.
    20. Anbarci, Nejat & Escaleras, Monica & Register, Charles A., 2005. "Earthquake fatalities: the interaction of nature and political economy," Journal of Public Economics, Elsevier, vol. 89(9-10), pages 1907-1933, September.
    21. Thomas K.J. McDermott & Frank Barry & Richard S.J. Tol, 2014. "Disasters and development: natural disasters, credit constraints, and economic growth," Oxford Economic Papers, Oxford University Press, vol. 66(3), pages 750-773.
    22. Cole, Shawn & Healy, Andrew & Werker, Eric, 2012. "Do voters demand responsive governments? Evidence from Indian disaster relief," Journal of Development Economics, Elsevier, vol. 97(2), pages 167-181.
    23. Aart Kraay & Vikram Nehru, 2006. "When Is External Debt Sustainable?," The World Bank Economic Review, World Bank, vol. 20(3), pages 341-365.
    24. Cassimon, Denis & Moreno-Dodson, Blanca & Wodon, Quentin, 2008. "Debt Sustainability for Low-Income Countries: A Review of Standard and Alternative Concepts," MPRA Paper 11077, University Library of Munich, Germany.
    25. Mark Skidmore & Hideki Toya, 2002. "Do Natural Disasters Promote Long-Run Growth?," Economic Inquiry, Western Economic Association International, vol. 40(4), pages 664-687, October.
    26. Neumayer, Eric & Plümper, Thomas & Barthel, Fabian, 2014. "The political economy of natural disaster damage," LSE Research Online Documents on Economics 50699, London School of Economics and Political Science, LSE Library.
    27. Mark Pelling & Alpaslan Özerdem & Sultan Barakat, 2002. "The macro-economic impact of disasters," Progress in Development Studies, , vol. 2(4), pages 283-305, October.
    28. Mr. Michael Keen & Mr. Paul K. Freeman & Mr. Muthukumara Mani, 2003. "Dealing with Increased Risk of Natural Disasters: Challenges and Options," IMF Working Papers 2003/197, International Monetary Fund.
    29. Goetz von Peter & Sebastian von Dahlen & Sweta C Saxena, 2012. "Unmitigated disasters? New evidence on the macroeconomic cost of natural catastrophes," BIS Working Papers 394, Bank for International Settlements.
    30. Matthew E. Kahn, 2005. "The Death Toll from Natural Disasters: The Role of Income, Geography, and Institutions," The Review of Economics and Statistics, MIT Press, vol. 87(2), pages 271-284, May.
    31. Miles Parker, 2018. "The Impact of Disasters on Inflation," Economics of Disasters and Climate Change, Springer, vol. 2(1), pages 21-48, April.
    32. Mr. Tobias N. Rasmussen, 2004. "Macroeconomic Implications of Natural Disasters in the Caribbean," IMF Working Papers 2004/224, International Monetary Fund.
    33. Kellenberg, Derek K. & Mobarak, Ahmed Mushfiq, 2008. "Does rising income increase or decrease damage risk from natural disasters?," Journal of Urban Economics, Elsevier, vol. 63(3), pages 788-802, May.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Pauline AVRIL & Grégory LEVIEUGE & Camélia TURCU, 2021. "Natural Disasters and Financial Stress: Can Macroprudential Regulation Tame Green Swans?," LEO Working Papers / DR LEO 2913, Orleans Economics Laboratory / Laboratoire d'Economie d'Orleans (LEO), University of Orleans.
    2. I. Koetsier, 2017. "The fiscal impact of natural disasters," Working Papers 17-17, Utrecht School of Economics.
    3. Roman Horvath, 2020. "Natural Catastrophes and Financial Development: An Empirical Analysis," Working Papers IES 2020/14, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised May 2020.
    4. Quy Ta & Yothin Jinjarak & Ilan Noy, 2022. "“How Do Shocks Affect International Reserves? A Quasi-Experiment of Earthquakes”," Open Economies Review, Springer, vol. 33(5), pages 945-971, November.
    5. Toan Phan & Felipe Schwartzman, 2023. "Climate Defaults and Financial Adaptation," Working Paper 23-06, Federal Reserve Bank of Richmond.
    6. Richard S. J. Tol, 2021. "The Economic Impact of Climate in the Long Run," World Scientific Book Chapters, in: Anil Markandya & Dirk Rübbelke (ed.), CLIMATE AND DEVELOPMENT, chapter 1, pages 3-36, World Scientific Publishing Co. Pte. Ltd..
    7. Jeroen Klomp & John Sseruyange, 2021. "Earthquakes and Economic Outcomes: Does Central Bank Independence Matter?," Open Economies Review, Springer, vol. 32(2), pages 335-359, April.
    8. Horvath, Roman, 2021. "Natural catastrophes and financial depth: An empirical analysis," Journal of Financial Stability, Elsevier, vol. 53(C).
    9. Richard S. J. Tol, 2022. "State capacity and vulnerability to natural disasters," Chapters, in: Mark Skidmore (ed.), Handbook on the Economics of Disasters, chapter 20, pages 434-457, Edward Elgar Publishing.
    10. Chistoph Grosse-Steffen & Laura Pagenhardt & Malte Rieth, 2021. "Committed to Flexible Fiscal Rules," Working papers 854, Banque de France.
    11. Cuadros-Solas, Pedro J. & Salvador, Carlos & Suárez, Nuria, 2021. "Am I riskier if I rescue my banks? Beyond the effects of bailouts," Journal of Financial Stability, Elsevier, vol. 56(C).
    12. Tian Zhao & Zhixin Liu, 2022. "Drivers of CO 2 Emissions: A Debt Perspective," IJERPH, MDPI, vol. 19(3), pages 1-18, February.
    13. Ryota Nakatani, 2021. "Fiscal Rules for Natural Disaster- and Climate Change-Prone Small States," Sustainability, MDPI, vol. 13(6), pages 1-26, March.
    14. Preeya Mohan & Eric Strobl, 2021. "The impact of tropical storms on the accumulation and composition of government debt," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 28(3), pages 483-496, June.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Klomp, Jeroen, 2020. "Do natural disasters affect monetary policy? A quasi-experiment of earthquakes," Journal of Macroeconomics, Elsevier, vol. 64(C).
    2. I. Koetsier, 2017. "The fiscal impact of natural disasters," Working Papers 17-17, Utrecht School of Economics.
    3. Eduardo Cavallo & Ilan Noy, 2009. "The Economics of Natural Disasters: A Survey," Research Department Publications 4649, Inter-American Development Bank, Research Department.
    4. John Sseruyange & Jeroen Klomp, 2021. "Natural Disasters and Economic Growth: The Mitigating Role of Microfinance Institutions," Sustainability, MDPI, vol. 13(9), pages 1-20, April.
    5. Lazzaroni, Sara & van Bergeijk, Peter A.G., 2014. "Natural disasters' impact, factors of resilience and development: A meta-analysis of the macroeconomic literature," Ecological Economics, Elsevier, vol. 107(C), pages 333-346.
    6. Peter A. G. van Bergeijk & Sara Lazzaroni, 2015. "Macroeconomics of Natural Disasters: Strengths and Weaknesses of Meta‐Analysis Versus Review of Literature," Risk Analysis, John Wiley & Sons, vol. 35(6), pages 1050-1072, June.
    7. Jeroen Klomp & John Sseruyange, 2021. "Earthquakes and Economic Outcomes: Does Central Bank Independence Matter?," Open Economies Review, Springer, vol. 32(2), pages 335-359, April.
    8. Ruohan Wu, 2023. "Natural disasters, climate change, and structural transformation: A new perspective from international trade," The World Economy, Wiley Blackwell, vol. 46(5), pages 1333-1377, May.
    9. Klomp, Jeroen & Hoogezand, Barry, 2018. "Natural disasters and agricultural protection: A panel data analysis," World Development, Elsevier, vol. 104(C), pages 404-417.
    10. Matthew Ranson & Lisa Tarquinio & Audrey Lew, 2016. "Modeling the Impact of Climate Change on Extreme Weather Losses," NCEE Working Paper Series 201602, National Center for Environmental Economics, U.S. Environmental Protection Agency, revised May 2016.
    11. Ilan Noy & Christopher Edmonds, 2016. "The Economic and Fiscal Burdens of Disasters in the Pacific," CESifo Working Paper Series 6237, CESifo.
    12. Eduardo Cavallo & Ilan Noy, 2010. "The Aftermath of Natural Disasters: Beyond Destruction," CESifo Forum, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 11(2), pages 25-35, July.
    13. Jeroen Klomp, 2020. "Election or Disaster Support?," Journal of Development Studies, Taylor & Francis Journals, vol. 56(1), pages 205-220, January.
    14. Matthew A. COLE & Robert J R ELLIOTT & OKUBO Toshihiro & Eric STROBL, 2013. "Natural Disasters and Plant Survival: The impact of the Kobe earthquake," Discussion papers 13063, Research Institute of Economy, Trade and Industry (RIETI).
    15. Wenzel, Lars & Wolf, André, 2013. "Protection against major catastrophes: An economic perspective," HWWI Research Papers 137, Hamburg Institute of International Economics (HWWI).
    16. Matthew A. COLE & Robert J R ELLIOTT & OKUBO Toshihiro & Eric STROBL, 2015. "Natural Disasters, Industrial Clusters and Manufacturing Plant Survival," Discussion papers 15008, Research Institute of Economy, Trade and Industry (RIETI).
    17. Ilan Noy & Christopher Edmonds, 2016. "The Economic and Fiscal Burdens of Disasters in the Pacific," CESifo Working Paper Series 6237, CESifo.
    18. Rahman, Muhammad Habibur & Anbarci, Nejat & Ulubaşoğlu, Mehmet A., 2022. "“Storm autocracies”: Islands as natural experiments," Journal of Development Economics, Elsevier, vol. 159(C).
    19. Eric Nazindigouba Kere & Somlanaré Romuald Kinda & Rasmané Ouedraogo, 2015. "Do Natural Disasters Hurt Tax Resource Mobilization?," CERDI Working papers halshs-01242968, HAL.
    20. Ryota Nakatani, 2021. "Fiscal Rules for Natural Disaster- and Climate Change-Prone Small States," Sustainability, MDPI, vol. 13(6), pages 1-26, March.

    More about this item

    Keywords

    Government debt; Sovereign default; Natural disasters;
    All these keywords.

    JEL classification:

    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • H6 - Public Economics - - National Budget, Deficit, and Debt
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jimfin:v:73:y:2017:i:pa:p:93-103. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/30443 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.