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Debt Sustainability under Catastrophic Risk; The Case for Government Budget Insurance

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  • Eduardo A. Cavallo
  • Eduardo Borensztein
  • Patricio A Valenzuela

Abstract

Natural disasters are an important source of vulnerability in the Caribbean region. Despite being one of the more disaster-prone areas of the world, it has one of the lowest levels of insurance coverage. This paper examines the vulnerability of Belize's public finance to the occurrence of hurricanes and the potential impact of insurance instruments in reducing that vulnerability. The paper finds that catastrophic risk insurance significantly improves Belize's debt sustainability. In addition, the methodology employed makes it possible to estimate the appropriate level of insurance, which for the case of Belize is a maximum coverage of US$120 million per year.

Suggested Citation

  • Eduardo A. Cavallo & Eduardo Borensztein & Patricio A Valenzuela, 2008. "Debt Sustainability under Catastrophic Risk; The Case for Government Budget Insurance," IMF Working Papers 2008/044, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:2008/044
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    More about this item

    Keywords

    Insurance; Natural disasters; Moral hazard; Debt sustainability; Debt sustainability analysis; WP; debt; insurance instrument;
    All these keywords.

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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