Natural catastrophes and financial depth: An empirical analysis

Abstract

We estimate the causal effect of natural catastrophes on financial depth. We focus on largest catastrophes in 1960–2016, employ synthetic control method to compute the counterfactual and use the private credit to GDP ratio as the measure of financial deepening. Our estimates show that the effects of natural catastrophes are sizable, statistically significant and long-lasting. We find that a decade after the catastrophe, credit/GDP ratio remains approximately 30% below its counterfactual. This result suggests that large-scale natural catastrophes severely undermine financial deepening in developing economies.