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High consumption volatility : the impact of natural disasters?

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  • Auffret, Philippe
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    Abstract

    A history of repeated external and domestic shocks has made economic insecurity a major concern across the Caribbean region. Of particular concern to all households, especially the poorest segments of the population, is the exposure to shocks that are generated by catastrophic events or natural disasters. The author shows that despite high consumption growth, the Caribbean region suffers from a high volatility of consumption that decreases household welfare. After presenting some empirical evidence that consumption volatility is higher in the Caribbean region than in the rest of the world, he makes some empirically testable inferences that help explain consumption volatility. The authordevelops a conceptual framework for analyzing the effects of catastrophic events on household and aggregate welfare. According to this framework, the volatility of consumption comes from production shocks that are transformed into consumption shocks mostly because of underdeveloped or ineffective risk-management mechanisms. Auffret conducts an empirical analysis of the impact of catastrophic events on 16 countries (6 from the Caribbean region and 10 from Latin America) from 1970-99 and shows that catastrophic events lead to: 1) A substantial decline in the growth of output. 2) A substantial decline in the growth of investment. 3) A more moderate decline in consumption growth (most of the decline is in private consumption, while public consumption declines moderately. 4) A worsening of the current account of the balance of payments.

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    Bibliographic Info

    Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2962.

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    Date of creation: 31 Jan 2003
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    Handle: RePEc:wbk:wbrwps:2962

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    Keywords: Economic Theory&Research; Financial Intermediation; Public Health Promotion; Environmental Economics&Policies; Consumption; Environmental Economics&Policies; Economic Theory&Research; Inequality; Consumption; Financial Intermediation;

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    1. Akerlof, George A, 1970. "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, MIT Press, vol. 84(3), pages 488-500, August.
    2. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
    3. Arellano, Manuel, 1993. "On the testing of correlated effects with panel data," Journal of Econometrics, Elsevier, vol. 59(1-2), pages 87-97, September.
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    Cited by:
    1. Jean-Louis Combes & Christian Ebeke, 2011. "Remittances and Household Consumption Instability in Developing Countries," Working Papers halshs-00552245, HAL.
    2. repec:idb:brikps:11118 is not listed on IDEAS
    3. Martin Gassebner & Alexander Keck & Robert Teh, 2006. "Shaken, not stirred: the impact of disasters on international trade," KOF Working papers 06-139, KOF Swiss Economic Institute, ETH Zurich.
    4. Michele Fratianni & Heejoon Kang, 2006. "International Terrorism, International Trade, and Borders," Working Papers 2006-13, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
    5. Karim, Azreen & Noy, Ilan, 2014. "Poverty and natural disasters: A meta-analysis," Working Paper Series 3234, Victoria University of Wellington, School of Economics and Finance.
    6. Heger, Martin & Julca, Alex & Paddison, Oliver, 2008. "Analysing the Impact of Natural Hazards in Small Economies: The Caribbean Case," Working Paper Series RP2008/25, World Institute for Development Economic Research (UNU-WIDER).
    7. Raghbendra Jha, 2006. "Vulnerability and Natural Disasters in Fiji, Papua New Guinea, Vanuatu and the Kyrgyz Republic," Departmental Working Papers 2006-05, The Australian National University, Arndt-Corden Department of Economics.
    8. Noy, Ilan & Karim, Azreen, 2013. "Poverty, inequality and natural disasters – A survey," Working Paper Series 2974, Victoria University of Wellington, School of Economics and Finance.
    9. Tavares, Jose, 2004. "The open society assesses its enemies: shocks, disasters and terrorist attacks," Journal of Monetary Economics, Elsevier, vol. 51(5), pages 1039-1070, July.
    10. Ercio Muñoz S. & Alfredo Pistelli M., 2010. "¿Tienen los Terremotos un Impacto Inflacionario en el Corto Plazo? Evidencia para una Muestra de Países," Notas de Investigación Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 13(2), pages 113-127, April.
    11. Raghbendra Jha, 2006. "Vulnerability of Consumption Growth in Rural India," ASARC Working Papers 2006-04, The Australian National University, Australia South Asia Research Centre.
    12. Paul A. Raschky & Manijeh Schwindt, . "Aid, Catastrophes and the Samaritan's Dilemma," Working Papers 2008-06, Faculty of Economics and Statistics, University of Innsbruck.
    13. Tobias N. Rasmussen, 2004. "Macroeconomic Implications of Natural Disasters in the Caribbean," IMF Working Papers 04/224, International Monetary Fund.

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