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Hurricanes: Intertemporal Trade and Capital Shocks

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John C. Bluedorn

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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: 2005
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Handle: RePEc:oxf:wpaper:241

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Related research
Keywords: Hurricanes Natural Experiment Current Account Dynamics

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Find related papers by JEL classification:
F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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References listed on IDEAS
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  3. Hoffman, Mathias, 2001. "The Relative Dynamics of Investment and the Current Account in the G7-Economies," Economic Journal, Royal Economic Society, vol. 111(471), pages C148-63, May. [Downloadable!] (restricted)
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  4. Giannone, Domenico & Lenza, Michele, 2004. "The Feldstein-Horioka Fact," CEPR Discussion Papers 4610, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  15. Mathias Hoffmann, 2003. "International macroeconomic fluctuations and the current account," Canadian Journal of Economics, Canadian Economics Association, vol. 36(2), pages 401-420, May. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. 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). [Downloadable!]
  2. Jiandong Ju & Shang-Jin Wei, 2007. "Current Account Adjustment: Some New Theory and Evidence," NBER Working Papers 13388, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. 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. [Downloadable!] (restricted)
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