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High consumption volatility : the impact of natural disasters?

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  • Auffret, Philippe

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.

Suggested Citation

  • Auffret, Philippe, 2003. "High consumption volatility : the impact of natural disasters?," Policy Research Working Paper Series 2962, The World Bank.
  • Handle: RePEc:wbk:wbrwps:2962
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    References listed on IDEAS

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    1. Arellano, Manuel, 1993. "On the testing of correlated effects with panel data," Journal of Econometrics, Elsevier, vol. 59(1-2), pages 87-97, September.
    2. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Oxford University Press, vol. 58(2), pages 277-297.
    3. George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, Oxford University Press, vol. 84(3), pages 488-500.
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    Citations

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    Cited by:

    1. 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.
    2. Oscar Becerra & Eduardo Cavallo & Ilan Noy, 2014. "Foreign Aid in the Aftermath of Large Natural Disasters," Review of Development Economics, Wiley Blackwell, vol. 18(3), pages 445-460, August.
    3. 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.
    4. Eduardo Cavallo & Ilan Noy, 2009. "The Economics of Natural Disasters: A Survey," Research Department Publications 4649, Inter-American Development Bank, Research Department.
    5. Tobias N. Rasmussen, 2004. "Macroeconomic Implications of Natural Disasters in the Caribbean," IMF Working Papers 04/224, International Monetary Fund.
    6. Karim, Azreen, 2016. "The household response to persistent natural disasters: Evidence from Bangladesh," Working Paper Series 4968, Victoria University of Wellington, School of Economics and Finance.
    7. Raghbendra Jha, 2006. "Vulnerability of Consumption Growth in Rural India," ASARC Working Papers 2006-04, The Australian National University, Australia South Asia Research Centre.
    8. Martin Gassebner & Alexander Keck & Robert Teh, 2010. "Shaken, Not Stirred: The Impact of Disasters on International Trade," Review of International Economics, Wiley Blackwell, vol. 18(2), pages 351-368, May.
    9. 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.
    10. 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.
    11. Combes, Jean-Louis & Ebeke, Christian, 2011. "Remittances and Household Consumption Instability in Developing Countries," World Development, Elsevier, vol. 39(7), pages 1076-1089, July.
    12. 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.
    13. 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.
    14. Parag Mahajan & Dean Yang, 2017. "Taken by Storm: Hurricanes, Migrant Networks, and U.S. Immigration," Working Papers 17-50, Center for Economic Studies, U.S. Census Bureau.
    15. Paul A. Raschky & Manijeh Schwindt, 2016. "Aid, Catastrophes and the Samaritan's Dilemma," Economica, London School of Economics and Political Science, vol. 83(332), pages 624-645, October.
    16. Parag Mahajan & Dean Yang, 2017. "Taken by Storm: Hurricanes, Migrant Networks, and U.S. Immigration," NBER Working Papers 23756, National Bureau of Economic Research, Inc.
    17. repec:eee:wdevel:v:103:y:2018:i:c:p:40-59 is not listed on IDEAS
    18. Heger, Martin & Julca, Alex & Paddison, Oliver, 2008. "Analysing the Impact of Natural Hazards in Small Economies: The Caribbean Case," WIDER Working Paper Series 025, World Institute for Development Economic Research (UNU-WIDER).
    19. repec:eee:wdevel:v:99:y:2017:i:c:p:395-418 is not listed on IDEAS

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