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

Abstract

The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues.An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished.The papers carry the names of the authors and should be cited accordingly.The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors.They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent. Policy Research Working Paper 5564Natural 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 This paper is a product of the Private & Financial Sectors Development Sector Unit, Europe and Central Asia Region.It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world.Policy Research Working Papers are also posted on the Web at http://econ.worldbank.org.The authors may be contacted at mmelecky@worldbank.org.and craddatz@worldbank.org.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.

Cite this work

No public copy is stored for this record, so only the metadata is cited.

Stored only when both papers are in the corpus — 108 citations exist upstream.

Papers that cite the same references — the relational fallback while embeddings are still backfilling.