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Hurricanes : Capital Shocks and Intertemporal Trade Theory JOB MARKET PAPER
| Content Provider | Semantic Scholar |
|---|---|
| Author | Bluedorn, John C. |
| Copyright Year | 2002 |
| Abstract | Hurricanes in the Caribbean and Central America represent a natural experiment to test the intertemporal approach to the current account. The intertemporal approach to the current account allows for the possibility of intertemporal trade, and hence consumption smoothing, through international borrowing. It provides the intertemporal foundation for new open economy macroeconomic models. Previous tests of intertemporal international macroeconomic (IIM) models have typically relied upon the exogeneity conditions implied by rational expectations to provide identification in a VAR framework (inspired by Campbell 1987). I argue that hurricanes can be plausibly modeled as country-specific, unanticipated, negative capital shocks to an economy, making the study of the economy’s behavior in their aftermath a strong test of an IIM model. In response to an unanticipated, negative capital shock, a standard IIM model implies a contemporaneous fall of real output, a rise in investment, a decline in saving, and a fall in the current account. It predicts a future rise in saving and the current account, as borrowing is paid back. Focusing on the small, open economies of the Caribbean and Central America, I estimate a fixed effects panel model to capture the response of these economies to strong, capital-destroying hurricanes. The results generally confirm the predicted IIM response. With a storm shock that results in a 6 percentage point decline in real output growth, the current account is estimated to move towards deficit by approximately 9 percent of GDP. This is later reversed by a move toward surplus of between 5-6 percent of GDP three to four years after a storm. JEL Classification: E290, F320, F410, O190 †Special thanks to David Romer, Maurice Obstfeld, Andrew Rose, and Michael Jansson for their guidance and comments. I would also like to thank Björn Brügemann, Elizabeth Cascio, Paola Guiliano, Rebecca Hellerstein, and Hui Tong for their support and feedback. All errors are mine. |
| File Format | PDF HTM / HTML |
| Alternate Webpage(s) | http://www.econ.ox.ac.uk/members/john.bluedorn/hurricanesintertemporalmodelempirics.pdf |
| Language | English |
| Access Restriction | Open |
| Content Type | Text |
| Resource Type | Article |
