Abstract
This paper investigates the impact of tropical storms on government debt accumulation and decomposition. To this end, we combine quarterly debt data and tropical storm loss data for the period 1993–2013 for the Eastern Caribbean. Our econometric results show that damaging storms cause debt to increase up to three quarters after the event, where this increase can be considerable for damaging enough storms. Much of this increase in debt is due to borrowing from foreign lenders by the central government. At the same time, there is also some shifting of the share of debt toward public corporations, although these tend to react more by financing from domestic sources.
Highlights
In the aftermath of a natural disaster, governments need immediate funds for reconstruction, cleanup, and emergency relief and aid in order to ensure a quick recovery
Damage due to a tropical storm immediately increases the debt to GDP ratio in an affected Eastern Caribbean
We investigate the impact of tropical storms on the accumulation of public debt and its decomposition using the case study of the Eastern Caribbean, a region characterized by high debt and tropical storm risk
Summary
In the aftermath of a natural disaster, governments need immediate funds for reconstruction, cleanup, and emergency relief and aid in order to ensure a quick recovery. In the case of developing countries, which generally have little government savings and catastrophe risk insurance coverage, international aid often can help finance recovery activities This money is, usually disbursed slowly, there is great uncertainty on the amount to be received, and the actual amount received is generally much lower than what is required (Melecky and Raddatz 2011; Borensztein et al 2009). The subsequent higher levels of debt and higher interest rates tend to lead to lower credit scores, resulting in higher budget deficits and causing debt to further increase, creating a vicious cycle which threatens debt sustainability (Koetsier 2017; Borensztein et al 2009) In this regard, there is emerging evidence that high levels of debt negatively affect economic growth (Greenidge et al 2010).
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