Coping With Disaster: The Impact of Hurricanes on International Financial Flows, 1970-2001

No 534, Working Papers from Research Seminar in International Economics, University of Michigan

Abstract: How well do countries cope with the aftermath of natural disasters? In particular, how well do international financial flows buffer economic losses from disasters? This paper focuses on hurricanes (one of the most common and destructive types of disasters), and examines the impact of hurricane damages on resource flows to affected countries. Due to the potential endogeneity of disaster damage, I exploit instrumental variables constructed from meteorological data on hurricanes. Instrumental variables estimates indicate that disaster damages lead to increases in national-level net inflows of migrants’ remittances, foreign lending, and foreign direct investment. These types of flows respond rapidly, within the first year after damages. Official development assistance (ODA) also responds positively to hurricane damage, but with a lag of roughly two years. On average, total inflows from these sources within the following four years amount to roughly four-fifths of estimated damages. The null hypothesis of full insurance of hurricane disaster damages cannot be rejected. By contrast, ordinary least squares estimates find essentially no response of international flows to disaster damages, highlighting the importance of an instrumental variables approach in this context.

Keywords: risk-sharing; insurance; official development assistance; foreign aid; remittances; foreign direct investment; international lending; natural disasters; hurricanes (search for similar items in EconPapers)
JEL-codes: F21 F22 F34 F35 O19 Q54 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2005
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

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Persistent link: https://EconPapers.repec.org/RePEc:mie:wpaper:534

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