Hurricanes: Intertemporal Trade and Capital Shocks

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.JEL Classification: F320, F410

The Economics of Natural Disasters: A Survey

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The Economic Growth Impact of Hurricanes: Evidence from U.S. Coastal Counties

“…From a macro-economic perspective there are, in contrast, a handful of papers that provide estimates of the growth impact of hurricane strikes. For instance, Bluedorn (2005) studies the response of the current account to hurricane activity in the Central American and Caribbean region and his findings suggest that the median damaging hurricane will cause output to fall by 0.3 percentage points, while Strobl's (2008) study of the same region suggests that economic growth rates are reduced by 0.8 percentage points for an average destructive hurricane. However, it is not clear whether such results from developing county samples are very relevant for a industrialized economy like the US, given that it appears to be a stylized fact in the literature that economic losses due to natural disasters are negatively correlated with economic wealth.…”

Does the exchange rate regime matter for real shocks? Evidence from windstorms and earthquakes

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