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Hurricanes: Intertemporal Trade and Capital Shocks

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  • John C. Bluedorn

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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  • John C. Bluedorn, 2005. "Hurricanes: Intertemporal Trade and Capital Shocks," Economics Series Working Papers 241, University of Oxford, Department of Economics.
  • Handle: RePEc:oxf:wpaper:241
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    Cited by:

    1. Yang Dean, 2008. "Coping with Disaster: The Impact of Hurricanes on International Financial Flows, 1970-2002," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 8(1), pages 1-45, June.
    2. Matthew Ranson & Lisa Tarquinio & Audrey Lew, 2016. "Modeling the Impact of Climate Change on Extreme Weather Losses," NCEE Working Paper Series 201602, National Center for Environmental Economics, U.S. Environmental Protection Agency, revised May 2016.
    3. Eric Nazindigouba Kere & Somlanare Romuald Kinda & Rasmané Ouedraogo, 2015. "Do Natural Disasters Hurt Tax Resource Mobilization?," Working Papers halshs-01242968, HAL.
    4. Eduardo Cavallo & Ilan Noy, 2009. "The Economics of Natural Disasters: A Survey," Research Department Publications 4649, Inter-American Development Bank, Research Department.
    5. Tutt, Jascha & Berlemann, Michael & Steinhardt, Max, 2014. "Behavioural Responses on Natural Disasters. Empirical Evidence from a Natural Experiment in Germany," Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100526, Verein für Socialpolitik / German Economic Association.
    6. Eric Strobl, 2011. "The Economic Growth Impact of Hurricanes: Evidence from U.S. Coastal Counties," The Review of Economics and Statistics, MIT Press, vol. 93(2), pages 575-589, May.
    7. Jiandong Ju & Shang-Jin Wei, 2007. "Current Account Adjustment: Some New Theory and Evidence," NBER Working Papers 13388, National Bureau of Economic Research, Inc.
    8. Eduardo Cavallo & Ilan Noy, 2010. "The Aftermath of Natural Disasters: Beyond Destruction," CESifo Forum, Ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 11(2), pages 25-35, July.
    9. Lopez, Ramon, 2009. "Natural disasters and the dynamics of intangible assets," Policy Research Working Paper Series 4874, The World Bank.
    10. Elif C. Arbatli, 2008. "Futures Markets, Oil Prices and the Intertemporal Approach to the Current Account," Staff Working Papers 08-48, Bank of Canada.
    11. Lueth Erik & Ruiz-Arranz Marta, 2008. "Determinants of Bilateral Remittance Flows," The B.E. Journal of Macroeconomics, De Gruyter, vol. 8(1), pages 1-23, October.
    12. repec:kap:openec:v:28:y:2017:i:4:d:10.1007_s11079-017-9440-5 is not listed on IDEAS
    13. Eric Strobl, 2009. "The impact of hurricane strikes on local cropland productivity: Evidence from the Carribean," Working Papers hal-00393883, HAL.

    More about this item

    Keywords

    Hurricanes; Natural Experiment; Current Account Dynamics;

    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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