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Hurricanes: Intertemporal Trade and Capital Shocks

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  • John C. Bluedorn

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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Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 241.

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Date of creation: 01 Jun 2005
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Handle: RePEc:oxf:wpaper:241

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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. Eric Strobl, 2009. "The Economic Growth Impact of Hurricanes: Evidence from US Coastal counties," Working Papers hal-00392382, HAL.
  3. Elif C. Arbatli, 2009. "Futures Markets, Oil Prices, and the Intertemporal Approach to the Current Account," 2009 Meeting Papers 406, Society for Economic Dynamics.
  4. Dean Yang, 2006. "Coping with Disaster: The Impact of Hurricanes on International Financial Flows, 1970-2002," NBER Working Papers 12794, National Bureau of Economic Research, Inc.
  5. Eduardo Cavallo & Ilan Noy, 2009. "The Economics of Natural Disasters - A Survey," Working Papers 200919, University of Hawaii at Manoa, Department of Economics.
  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. Eric Strobl, 2009. "The impact of hurricane strikes on local cropland productivity: Evidence from the Carribean," Working Papers hal-00393883, HAL.
  8. Lopez, Ramon, 2009. "Natural disasters and the dynamics of intangible assets," Policy Research Working Paper Series 4874, The World Bank.
  9. 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.

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