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Hurricanes: intertemporal trade and capital shocks

Hurricanes: intertemporal trade and capital shocks
Hurricanes: intertemporal trade and capital shocks
Hurricanes in the Caribbean and Central America represent a natural experiment to test the intertemporal approach to current account determination. The intertemporal approach allows for the possibility of intertemporal trade, via international borrowing. Previous tests of intertemporal current account (ICA) models have typically relied upon the identification of shocks in a VAR framework with which to trace the current account response. Hurricane shocks represent exactly the kind of temporary, country-specific shock required by the theory, allowing for the intertemporal current account response to be estimated without recourse to a VAR shock decomposition. Using data on the economic damages attributable to a hurricane, I estimate the economy`s response to a hurricane-induced capital shock within a fixed effects panel model. The current account response qualitatively conforms to the S-shaped response predicted by the theory, indicating that countries are engaging in intertemporal trade. However, the exact timing and magnitude of the response differs from a standard ICA model`s smooth behavior. A hurricane which destroys capital valued at one year`s GDP pushes the current account over GDP into deficit by 5 percentage points initially. 3-8 years after such a hurricane, the current account over GDP moves into surplus at 2.7 percentage points.
hurricanes, natural experiment, intertemporal current account model
1471-0498
2005-241
University of Oxford
Bluedorn, John C.
f2ebe71c-2c3a-443b-a88c-659bcd483b3a
Bluedorn, John C.
f2ebe71c-2c3a-443b-a88c-659bcd483b3a

Bluedorn, John C. (2005) Hurricanes: intertemporal trade and capital shocks (Oxford Economics Working Paper, 2005-241) Oxford, UK. University of Oxford 82pp.

Record type: Monograph (Working Paper)

Abstract

Hurricanes in the Caribbean and Central America represent a natural experiment to test the intertemporal approach to current account determination. The intertemporal approach allows for the possibility of intertemporal trade, via international borrowing. Previous tests of intertemporal current account (ICA) models have typically relied upon the identification of shocks in a VAR framework with which to trace the current account response. Hurricane shocks represent exactly the kind of temporary, country-specific shock required by the theory, allowing for the intertemporal current account response to be estimated without recourse to a VAR shock decomposition. Using data on the economic damages attributable to a hurricane, I estimate the economy`s response to a hurricane-induced capital shock within a fixed effects panel model. The current account response qualitatively conforms to the S-shaped response predicted by the theory, indicating that countries are engaging in intertemporal trade. However, the exact timing and magnitude of the response differs from a standard ICA model`s smooth behavior. A hurricane which destroys capital valued at one year`s GDP pushes the current account over GDP into deficit by 5 percentage points initially. 3-8 years after such a hurricane, the current account over GDP moves into surplus at 2.7 percentage points.

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More information

Published date: 1 September 2005
Keywords: hurricanes, natural experiment, intertemporal current account model

Identifiers

Local EPrints ID: 42752
URI: https://eprints.soton.ac.uk/id/eprint/42752
ISSN: 1471-0498
PURE UUID: 95ed8bcd-08d1-47e6-8fb9-ae76210df238

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Date deposited: 18 Jan 2007
Last modified: 08 Apr 2019 16:31

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Author: John C. Bluedorn

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