Journal Article

Fiscal Responses after Catastrophes and the Enabling Role of Financial Development

Martin Melecky and Claudio Raddatz

in The World Bank Economic Review

Volume 29, issue 1, pages 129-149
Published in print February 2015 | ISSN: 0258-6770
Published online January 2014 | e-ISSN: 1564-698X | DOI: http://dx.doi.org/10.1093/wber/lht041
Fiscal Responses after Catastrophes and the Enabling Role of Financial Development

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  • Environmental Economics
  • National Government Expenditures and Related Policies
  • National Budget, Deficit, and Debt
  • Prices, Business Fluctuations, and Cycles

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Natural disasters may constitute a major shock to public finances and debt sustainability because of their impact on output and the need for government response with reconstruction and relief expenses. The question arises of whether governments can use financial development policy as the means to mitigate or insure against this negative fiscal impact. This paper uses a panel vector autoregressive model, estimated on annual data for high- and middle-income countries over 1975–2008, to study the role of debt market development and insurance penetration in enabling fiscal response after catastrophes. The authors find that countries with higher debt market development suffer smaller real consequences from disasters but that their deficits expand further following the mitigating fiscal response. Disasters in countries with high insurance penetration also experience smaller real consequences of disasters but without the need for further deficit expansions. From an ex-post perspective, the availability of insurance could offer the best mitigation approach against the real and fiscal consequences of disasters.

Keywords: Q54; H50; H60; E32

Journal Article.  8721 words.  Illustrated.

Subjects: Environmental Economics ; National Government Expenditures and Related Policies ; National Budget, Deficit, and Debt ; Prices, Business Fluctuations, and Cycles

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