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Local Shocks, Limited Fiscal Response: Natural Disasters and Municipal Public Finances in Colombia

Author

Listed:
  • Oscar Becerra

    (Universidad de los Andes)

  • Brigitte Castañeda

    (Universidad de los Andes)

  • David Perez-Reyna

    (Universidad de los Andes)

  • Angel Avila

    (Universidad de los Andes)

Abstract

This paper examines how natural disasters affect local economic activity and municipal public finances in Colombia between 2000 and 2024. Using an event-study design across 1,101 municipalities, we exploit the timing of high-intensity hydrometeorological shocks. We find that disasters cause a persistent decline in local economic activity, reducing nighttime luminosity by 3% in smaller municipalities. However, municipal public finances exhibit no countercyclical response: aggregate revenues, expenditures, and intergovernmental transfers remain largely unchanged. This muted fiscal reaction reflects institutional rigidities, including earmarked transfers and statutory spending limits, highlighting the need for rule-based, automatic parametric funding mechanisms to enhance subnational resilience.

Suggested Citation

  • Oscar Becerra & Brigitte Castañeda & David Perez-Reyna & Angel Avila, 2026. "Local Shocks, Limited Fiscal Response: Natural Disasters and Municipal Public Finances in Colombia," Documentos CEDE 2026-48, Universidad de los Andes, Facultad de Economía, CEDE.
    • Handle: RePEc:col:000089:023643
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    JEL classification:

    • H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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