The Fiscal Implications of Hurricane Strikes in the Caribbean

Disaster Risk Financing and Insurance (DRFI) Workshop presentation

In this study, researchers address the limitations of the current literature by explicitly examining higher frequency, i.e., monthly, fiscal reactions to natural disaster events. Additionally, and unlike previous studies, they also provide estimates of return periods of fiscal shortages in an extreme value theory framework.  To these ends, the researchers compile a data set of monthly potential hurricane losses and fiscal expenditure and revenue over the 2000-2012 period for a set of Caribbean countries.  They combine these data with destruction estimates derived from actual hurricane tracks and a detailed spatial distribution of assets.  The econometric analysis on this data shows that government revenue drops immediately after a shock, while there is no discerning significant effect on total public expenditure. Examining the main components of expenditure, however, the researchers discover that current expenditure increases temporarily two months following the shock. Overall, they find that there is an immediate and sizable impact on Caribbean economies’ monthly budget deficit. Using the estimates and extreme value modeling they think that return periods of significant fiscal impacts may be considerable for many of the island economies in the Caribbean.