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How do governments respond after catastrophes ? natural-disaster shocks and the fiscal stance

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  • Melecky, Martin
  • Raddatz, Claudio

Abstract

Natural disasters could constitute a major shock to public finances and debt sustainability because of their impact on output and the need for reconstruction and relief expenses. This paper uses a panel vector autoregressive model to systematically estimate the impact of geological, climatic, and other types of natural disasters on government expenditures and revenues using annual data for high and middle-income countries over 1975-2008. The authors find that, on average budget, deficits increase only after climatic disasters, but for lower-middle-income countries, the increase in deficits is widespread across all events. Disasters do not lead to larger deficit increases or larger output declines in countries with higher initial government debt. Countries with higher financial development suffer smaller real consequences from disasters, but deficits expand further in these countries. Disasters in countries with high insurance penetration also have smaller real consequences but do not result in deficit expansions. From an ex-post perspective, the availability of insurance offers the best mitigation approach against real and fiscal consequences of disasters.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 5564.

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Date of creation: 01 Feb 2011
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Handle: RePEc:wbk:wbrwps:5564

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Related research

Keywords: Debt Markets; Natural Disasters; Economic Theory&Research; Disaster Management; Access to Finance;

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Cited by:
  1. Ilan Noy, 2012. "Natural Disasters and Economic Policy for the Pacific Rim," Working Papers 201201, University of Hawaii at Manoa, Department of Economics.
  2. Dybczak, Kamil & Melecky, Martin, 2011. "Macroeconomic Shocks and the Fiscal Stance within the EU: A Panel Regression Analysis," MPRA Paper 33684, University Library of Munich, Germany.
  3. Weonho Yang & Jan Fidrmuc & Sugata Ghosh, 2012. "Government Spending Shocks and the Multiplier: New Evidence from the U.S. Based on Natural Disasters," CESifo Working Paper Series 4005, CESifo Group Munich.
  4. Ahlerup, Pelle, 2013. "Are Natural Disasters Good for Economic Growth?," Working Papers in Economics 553, University of Gothenburg, Department of Economics.
  5. Dybczak, Kamil & Melecky, Martin, 2014. "EU fiscal stance vulnerability: Are the old members the gold members?," Economic Modelling, Elsevier, vol. 38(C), pages 87-101.
  6. Brent LAYTON, 2013. "Impact of Natural Disasters on Production Networks and Urbanization in New Zealand," Working Papers DP-2013-13, Economic Research Institute for ASEAN and East Asia (ERIA).
  7. Melecky, Ales & Melecky, Martin, 2011. "Analyzing the Impact of Macroeconomic Shocks on Public Debt Dynamics: An Application to the Czech Republic," MPRA Paper 34114, University Library of Munich, Germany.
  8. Nicole Laframboise & Boileau Loko, 2012. "Natural Disasters: Mitigating Impact, Managing Risks," IMF Working Papers 12/245, International Monetary Fund.

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