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Hurricanes: Intertemporal Trade and Capital Shocks

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  • John C. Bluedorn

    ()
    (Dept of Economcis, University of Oxford)

Abstract

Hurricanes in the Caribbean and Central-America represent a natural experiment to test the intertemporal approach to current account determination. The intertemporal approach allows for the possibility of intertemporal trade, via international borrowing. Previous tests of intertemporal current account (ICA) models have typically relied upon the identification of shocks in a VAR framework with which to trace the current account response. Hurricane shocks represent exactly the kind of temporary, country-specific shock required by the theory, allowing for the intertemporal current account response to be estimated without recourse to a VAR shock decomposition. Using data on the economic damages attributable to a hurricane, I estimate the economy's response to a hurricane-induced capital shock within a fixed effects panel model. The current account response qualitatively conforms to the S-shaped response predicted by the theory, indicating that countries are engaging in intertemporal trade. However, the exact timing and magnitude of the response differs from a standard ICA model's smooth behavior. A hurricane which destroys capital valued at one year's GDP pushes the current account over GDP into deficit by 5 percentage points initially. 3-8 years after such a hurricane, the current account over GDP moves into surplus at 2.7 percentage points.

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File URL: http://www.nuffield.ox.ac.uk/economics/papers/2005/W22/bluedorn2005hurricanes.pdf
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Bibliographic Info

Paper provided by Economics Group, Nuffield College, University of Oxford in its series Economics Papers with number 2005-W22.

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Length: 81 pages
Date of creation: 01 May 2005
Date of revision:
Handle: RePEc:nuf:econwp:0522

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Web page: http://www.nuff.ox.ac.uk/economics/

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Keywords: hurricanes; natural experiment; current account dynamics;

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Cited by:
  1. Elif C. Arbatli, 2008. "Futures Markets, Oil Prices and the Intertemporal Approach to the Current Account," Working Papers 08-48, Bank of Canada.
  2. Elif C. Arbatli, 2009. "Futures Markets, Oil Prices, and the Intertemporal Approach to the Current Account," 2009 Meeting Papers 406, Society for Economic Dynamics.
  3. Strobl, Eric, 2008. "The Economic Growth Impact of Hurricanes: Evidence from US Coastal Counties," IZA Discussion Papers 3619, Institute for the Study of Labor (IZA).
  4. Eric Strobl, 2009. "The impact of hurricane strikes on local cropland productivity: Evidence from the Carribean," Working Papers hal-00393883, HAL.
  5. Eduardo Cavallo & Ilan Noy, 2009. "The Economics of Natural Disasters: A Survey," Research Department Publications 4649, Inter-American Development Bank, Research Department.
  6. Jiandong Ju & Shang-Jin Wei, 2007. "Current Account Adjustment: Some New Theory and Evidence," NBER Working Papers 13388, National Bureau of Economic Research, Inc.
  7. Eduardo Cavallo & Ilan Noy, 2010. "The Aftermath of Natural Disasters: Beyond Destruction," CESifo Forum, Ifo Institute for Economic Research at the University of Munich, vol. 11(2), pages 25-35, 07.
  8. 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.
  9. Lopez, Ramon, 2009. "Natural disasters and the dynamics of intangible assets," Policy Research Working Paper Series 4874, The World Bank.

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