Disaster Shocks Research Articles

Fiscal Rules for Natural Disaster- and Climate Change-Prone Small States

How should small states formulate a countercyclical fiscal policy to achieve economic stability and fiscal sustainability when they are prone to natural disasters, climate change, commodity price changes, and uncertain donor grants? We study how natural disasters and climate change affect long-term debt dynamics, and we propose cutting-edge fiscal policy rules. We find the primacy of a recurrent expenditure rule based on non-resource and non-grant revenue, interdependently determined by government debt and budget balance targets with expected disaster shocks. This innovative fiscal rule is classified as a natural disaster-resilient fiscal rule, which comprises a plethora of new advantages compared to existing fiscal rules. This new type of fiscal rule can be called as the third-generation fiscal rule. It encompasses natural disasters and climate change, uses budget data only, avoids the need for escape clauses, and operates on a timely basis. Our rule-based fiscal policy framework is practically applicable for many developing countries facing an increasing frequency and impact of devastating natural hazards, and climatic change.

Does disaster shocks affect farmers’ willingness for insurance? Mediating effect of risk perception and survey data from risk-prone areas in East China

The study estimates the impact of disaster shocks and risk perception on farmers’ willingness for insurance. Based on data of 328 farmers from the Shandong province of East China, the study uses cluster analysis, analysis of variance, hierarchical linear model and structural equation model to determine the impact of disaster shocks and risk perception on farmers’ willingness for insurance. A bootstrap method of bias correction was used to test the mediating effect of risk perception between disaster shocks and insurance willingness. Results revealed that the overall willingness of farmers for crop insurance was low. However, the farmers’ willingness for crop insurance increased with an increase in disaster shocks and risk perception. The parametric analysis also confirmed that disaster shocks and risk perceptions have a significant and positive impact on the farmers’ willingness for crop insurance. Risk perception has a partial mediating effect between disaster shock and farmers’ willingness for crop insurance. It indicates that disaster shock not only impacts on farmers’ willingness for crop insurance directly but also has an indirect impact on farmers’ willingness for crop insurance through risk perception. Farmers are encouraged to participate in the early warning disaster programs to increase awareness of climate change and resilience against weather aberrations.

Natural disaster shock, risk aversion and corn farmers’ adoption of degradable mulch film: evidence from Zhangye, China

PurposeDegradable mulch film (DMF) is a potential alternate to polyethylene (PE) mulching. In this regard, the purpose of this paper is to explore the effects and paths of natural disaster shock and risk aversion influencing farmers’ DMF adoption.Design/methodology/approachThis research is conducted by collecting cross-sectional data of corn farmers in Zhangye, China. First, by using the Tobit model, the paper attempts to explore the effects of natural disaster shock and risk aversion influencing farmers’ DMF adoption. Second, IV-Tobit model is applied to deal with endogenous problems between risk aversion and DMF adoption. Additionally, the researchers used a moderating model to analyze feasible paths of natural disaster shock and risk aversion impacting farmers’ DMF adoption.FindingsThe outcomes show that natural disaster shock and risk aversion significantly and positively affect farmers’ DMF adoption. Though risk aversion plays a significant moderating effect in influencing farmers’ DMF adoption by natural disaster shock, the moderating effect has a serious disguising effect. By considering the heterogeneity of risk aversion, the paper further confirms that if the intensity of natural disaster shock is increased by one unit, the intensity of MDF adoption by farmers with high-risk aversion also tends to increase by 15.85%.Originality/valueThis study is the pioneer one, which is evaluating the intensity of farmers’ DMF adoption from adoption ratio, investment amount, labor input and adoption time. Additionally, the research provides important guidelines for policymakers to motivate medium and low-risk aversion farmers to adopt DMF.

Expectation formation following pandemic events

Previous studies find that the degree of information rigidity is negatively associated with natural disaster shocks, recessions, and high economic uncertainty, suggesting that the expectation formation process is state dependent. Matching a large panel data of macroeconomic forecasts to the pandemic data, this letter shows that the degree of information rigidity declines significantly following pandemic events, confirming that the expectation formation process is also driven by unexpected health shocks.

Social Distancing and the Macrofinancial Consequences of Natural Disasters

We use the COVID-19 pandemic as a natural experiment to estimate the effects of a global disaster shock on economic activity, international trade, and financial markets. To identify the shock, we exploit cross-country variation in the timing and intensity of pandemic-induced social distancing at daily frequency. An unexpected reduction in human mobility relative to pre-pandemic levels leads to significant declines in high-frequency measures of global economic activity, such as daily nitrogen dioxide concentrations and daily maritime trade carried by large cargo ships. Global stock markets decline, and sovereign credit spreads persistently widen after the pandemic disaster shock.

Disaster Risk, Politicians, and Firm Capital Exuding: A New Role of Stock Market Participation

We propose a new function of stock market – to align voters’ preferences to politicians’ policies. We build a model with politicians’ ability to abate negative disaster shocks. Pro-business politicians are more likely to get re-elected when voters hold firm equity, and because of less severe disaster shocks, firms exude less capital and allocate investment more efficiently. We construct a novel stock market participation data for U.S. states using IRS statistics. We find that companies in states with higher stock market participation invest more efficiently and elect pro-business politicians. We use a novel neighboring states methodology and financial literacy instrument to eliminate endogeneity concerns.

Adapting to Climate Change in Vietnam: Insights from a Structural Model

Vietnam is increasingly exposed to climate change. The COVID-19 crisis offers an opportunity to push for green investment and climate-resilient adaptation. In this context, the paper uses a DSGE structural model, calibrated to features of the Vietnamese economy, to simulate the macroeconomic trade-offs of investing in resilient infrastructure. Compared to scenarios of a baseline no policy change and additional standard infrastructure spending, the model findings illustrate the long-term benefits of adaptation infrastructure investments on growth and public debt dynamics. Specifically, while adaptation infrastructure is initially slightly costlier during the scale-up period, it can better withstand natural disaster shocks, and over time, would have lower maintenance costs and higher return than conventional infrastructure. Other model scenarios illustrate the trade-offs of different financing sources as well as the benefits of public financial management reforms that improve investment efficiency.

Sierra Leone's Pliability to Crisis and Disaster: A Shock Resistance Model

The construct of resilience to the Sierra Leonean for adapting to crisis and disaster is anchored to and from a more direct and inherent panache with the traditional traits and strength-based problem focus approach to life. The scholarly gap in understanding collectivistic dynamics in resilience remains unexplored in the context of Sierra Leone's unique resilient attributes. Therefore, this review examined the community resilience with the disaster Shock Resistant Model (SRM) within the cultural background of Sierra Leone. The result may help disaster response managers review, design, and implement community reconstruction programs in post-disaster intervention programs.

Modelling and Estimating Large Macroeconomic Shocks During the Pandemic

This paper proposes and estimates a new Two-Sector One-Agent model that features large shocks. The resulting medium-scale New Keynesian model includes the standard real and nominal frictions used in the empirical literature and allows for heterogeneous COVID-19 pandemic exposure across sectors. We solve the model nonlinearly and we propose a new nonlinear, non-Gaussian filter designed to handle large pandemic shocks to make inference feasible after 2020. Monte Carlo experiments show that it correctly identifies the source and time location of shocks with a massively reduced running time, making the estimation of macro-models with disaster shocks feasible. The estimation is carried out using the Sequential Monte Carlo sampler recently proposed by Herbst and Schorfheide (2014).Our empirical results show that the pandemic-induced economic downturn can be reconciled with a combination of large demand and supply shocks. More precisely, starting from the second quarter of 2020, the model detects the occurrence of a large negative demand shock in consuming all kinds of goods, together with a large negative demand shock in consuming contact-intensive products. On the supply side, our proposed method detects a large labor supply shock to the general sector and a large labor productivity shock in the pandemic-sensitive sector.

The Deposits Channel of Aggregate Fluctuations

This paper presents a new mechanism through which the geography of bank deposits increases financial fragility. We document the within-bank geographic concentration of deposits -- 30% of bank deposits are concentrated in a single county. We combine this within-bank geographic concentration of deposits with local natural-disaster-induced property damages to construct novel bank deposit shocks. On aggregate, these shocks can explain 3.30% of variation in economic growth. Local disaster shocks result in aggregate fluctuations through their effect on deposits, which negatively affect bank lending. Financial frictions such as regulatory constraints, informational advantages, and borrower constraints are critical for the aggregation of shocks.

Government Insurance Against Natural Disasters

This paper estimates insurance requirements against natural disasters (NDs) in the Eastern Caribbean Currency Union (ECCU) using an insurance layering framework. The layers include a government saving fund, as well as market instruments. Each layer is calibrated to cover estimated fiscal cost of NDs according to intensity and expected damage. The results indicate that ECCU countries could target saving fund stocks for relativelly smaller and more frequent events in the range of 6-12 percent of GDP, enough to cover 95 percent of NDs’ fiscal costs. To ensure financially-sustainable saving funds with a low probability of depletion, this requires annual budget savings in the range os 0.5 to 1.9 percent of GDP per year. Additional coverage could be obtained with market instruments for large and less frequent events, albeit at a significant cost.The results are based on a Monte-Carlo experiment that simulates natural disaster shocks and their impact on output and government finances.

Can the Adoption of Protected Cultivation Facilities Affect Farm Sustainability?

Given the increasing threat of climate change to agriculture, determining how to achieve farm sustainability is important for researchers and policy makers. Among others, protected cultivation has been proposed as a possible adaptive solution at the farm level. This study contributes to this research topic by quantifying the effects of the use of protected cultivation facilities on farm sustainability. In contrast to previous studies that relied on small-scale random surveys, a population-based sample of fruit, flower and vegetable farms was drawn from the Agricultural Census Survey in Taiwan. Propensity score matching, inverse probability weighting and inverse probability weighting regression adjustment methods were applied. Empirical results show that the use of protected cultivation facilities increases farm profit by 68–73%, other things being equal. This finding is persistent when farms suffer from disaster shocks. Moreover, the changes in farm labor use can be seen as a mechanism behind the positive effect of the protected cultivation facility use on farm profit. Our findings suggest that agricultural authority can consider subsidizing farms to increase the adoption of protected cultivation facilities to mitigate the risks resulting from natural disaster shocks.

Climate Disaster Risks—Empirics and a Multi-Phase Dynamic Model

Recent research in financial economics has shown that rare large disasters have the potential to disrupt financial sectors via the destruction of capital stocks and jumps in risk premia. These disruptions often entail negative feedback effects on the macroeconomy. Research on disaster risks has also actively been pursued in the macroeconomic models of climate change. Our paper uses insights from the former work to study disaster risks in the macroeconomics of climate change and to spell out policy needs. Empirically, the link between carbon dioxide emission and the frequency of climate related disaster is investigated using a panel data approach. The modeling part then uses a multi-phase dynamic macro model to explore the effects of rare large disasters resulting in capital losses and rising risk premia. Our proposed multi-phase dynamic model, incorporating climate-related disaster shocks and their aftermath as a distressed phase, is suitable for studying mitigation and adaptation policies as well as recovery policies.

Nexus between natural and technical disaster shocks, resource depletion and growth-specific factors: evidence from quantile regression

The objective of the study is to examine the impact of natural disasters on environmental resource depletion in a context of Pakistan by using a consistent time series data from 1975 to 2016. The results of quantile regression confirm that both the natural and technical disaster degrade the environment in the form of forest depletion, mineral depletion and energy resource depletion at different quantile distributions. Further, FDI inflows and per capita income deteriorate natural environment through unsustainable mode of production in a country. The results emphasized the need to make an efficient disaster management unit to minimize economic losses through large-scale information and communication technologies. The results conclude that natural resources globally are being consumed faster than the speed of restoration. Worse is the case in Pakistan. As such the Government should make a systematic methodology to identify the protectoral functions within the communities for safeguarding and reestablishing these natural resources.

From Satellite to Supply Chain: New Approaches Connect Earth Observation to Economic Decisions

Global supply chains shift environmental and social impacts of consumption to remote locations. This opacity challenges many sustainability goals. To help businesses and governments realize more sustainable supply chains, new approaches are using spatial data and machine-learning techniques to connect Earth observation data to conventional economic tools.

The Perfect Storm: How to Prepare against Climate Risk and Disaster Shocks in the Time of COVID-19

As governments tackle the coronavirus disease 2019 (COVID-19) recovery, broader institutional reforms should build shock-responsive systems for the future. The time is now to boost financial preparedness to climate risks and disasters.

Expectation Formation Following Large, Unexpected Shocks

By matching a large database of individual macroforecaster data with the universe of sizable natural disasters across 54 countries, we identify a set of new stylized facts: forecasters are persistently heterogeneous in how often they issue or revise a forecast; information rigidity declines significantly following large, unexpected natural disaster shocks; and disagreement decreases among inattentive agents while it might increase for attentive ones. We develop a learning model that captures the two channels through which natural disaster shocks affect expectation formation: attention effect—the visibly large shocks induce immediate and synchronized updating of information for inattentive agents—and uncertainty effect—attentive agents might increase their acquisition of private information to compensate for the higher uncertainty after shocks.

Assessment of coupling coordination between tourism development and economic growth after the 2008 Wenchuan earthquake: Beichuan, China

ABSTRACT This paper establishes one comprehensive index system and investigates the coupling coordination between tourism development and economic growth of Beichuan County following the 2008 Wenchuan earthquake, as well as examines the causal relationship. The results of the coupling coordination degree model (CCDM) illustrate that the coordinating level of tourism development and economic growth increases in 2001–2017, with strong fluctuation in 2008. The causal results using unit root test, Cointegration test, and Grange causal test show that tourism can significantly promote economic growth in 2008–2017. The outcomes may be attributed to the disaster shock, macro-policy and government-led reconstruction mode. Lastly, the theoretical and practical implications for policymakers are provided.

Education and Disaster Vulnerability in Southeast Asia: Evidence and Policy Implications

This article summarizes the growing theoretical and empirical literature on the impact of education on disaster vulnerability with a focus on Southeast Asia. Education and learning can take place in different environments in more or less formalized ways. They can influence disaster vulnerability as the capacity to anticipate, cope with, resist, and recover from natural hazard in direct and indirect ways. Directly, through education and learning, individuals acquire knowledge, abilities, skills and perceptions that allow them to effectively prepare for and cope with the consequences of disaster shocks. Indirectly, education gives individuals and households access to material, informational and social resources, which can help reducing disaster vulnerability. We highlight central concepts and terminologies and discuss the different theoretical mechanisms through which education may have an impact. Supportive empirical evidence is presented and discussed with a particular focus on the role of inclusiveness in education and challenges in achieving universal access to high-quality education. Based on situation analysis and best practice cases, policy implications are derived that can inform the design and implementation of education and learning-based disaster risk reduction efforts in the region.

Impact of natural disaster shocks and macroeconomic growth in Asia

Climate-related natural disaster shocks are expected to rise as the earth is getting warmer, which will adversely affect growth globally. Empirically, the effects of typhoons and droughts have negative impacts on economic growth and would likely to persist up to 2 decades. Using the typhoon landfalls and damage in Asia, we analyze the wind–damage relationship and find damages to gross domestic product increase by 2.3% for an increase in maximum wind speed. The extreme projected temperature rise in Representative Concentration Pathway (RCP) 8.5 will result in higher typhoon damage by more than 50% in 2100. Vulnerable developing Asian economies could expect dampened growth with significant impacts on agriculture and tourism, a concern that may undermine years of development and worsen inequality. To cope with increasing disaster risks, both short-term adaptation strategies like relocation, government transfers, and other social safety nets, as well as long-term strategies are needed.