Fiscal shortage risk and the potential role for tropical storm insurance: evidence from the Caribbean

Recently a number of multi-country insurance schemes have been introduced to deal with short-term fiscal liquidity gaps after natural disasters. However, little is known about the actual underlying risk to the fiscal sector just after such events. In this paper, we estimate the risk of fiscal shorta...

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Bibliographic Details
Published in:Environment and development economics 2018-12, Vol.23 (6), p.702-720
Main Authors: Ouattara, Bazoumana, Strobl, Eric, Vermeiren, Jan, Yearwood, Stacia
Format: Article
Language:English
Subjects:
Budget deficits
Cyclones
Deficit financing
Disasters
Econometrics
Economic development
Economic models
Expenditures
Extreme values
Government spending
Hurricanes
Insurance
Islands
Liquidity
Natural disasters
RESEARCH ARTICLE
Revenue
Risk assessment
Shortages
Storm damage
Storms
Strikes
Tidal waves
Tropical storms
Wind
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Summary:Recently a number of multi-country insurance schemes have been introduced to deal with short-term fiscal liquidity gaps after natural disasters. However, little is known about the actual underlying risk to the fiscal sector just after such events. In this paper, we estimate the risk of fiscal shortages due to tropical storms in the Caribbean. To this end, first we use a panel VAR and estimate that while government expenditure does not respond to damages due to tropical storms, there is a significant contemporaneous effect on fiscal revenue. The results also reveal that different components of expenditure and revenue respond differently to hurricane shocks. Then, employing a parametric bulk extreme value model on estimated losses due to historical events, we show that the fiscal shortage due to storms can potentially be sizeable depending on the rarity of the event, but varies considerably across islands. However, any risk assessment is fraught with considerable uncertainty, particularly for rare but potentially very damaging tropical storm strikes.
ISSN:1355-770X
1469-4395
DOI:10.1017/S1355770X18000244