Skip to main content Accessibility help

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

  • Bazoumana Ouattara (a1), Eric Strobl (a2), Jan Vermeiren (a3) and Stacia Yearwood (a4)


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.


Corresponding author

*Corresponding author. Email:


Hide All
Behrens, C, Lopes, H and Gamerman, D (2004) Bayesian analysis of extreme events with threshold estimation. Statistical Modeling 4, 227244.
Caribbean Catastrophe Risk Insurance Facility (CCRIF) (2010) Enhancing the Climate Risk and Adaptation Fact Base for the Caribbean. Caribbean Catastrophe Risk Insurance Facility Publication, Grand Cayman.
Caribbean Catastrophe Risk Insurance Facility (CCRIF) (2012) Understanding CCRIF's hurricane and earthquake policies. Caribbean Catastrophe Risk Insurance Facility Publication. Available at
Coles, S (2001) An Introduction to Statistical Modeling of Extreme Values. Heidelberg: Springer Verlag.
Deryugina, T (2016) The fiscal cost of hurricanes: disaster aid versus social insurance. National Bureau of Economic Research, Inc., NBER Working Paper 22272.
Everaert, G and Pozzi, L (2007) Bootstrap-based bias correction for dynamic panels. Journal of Economic Dynamics and Control 31, 11601184.
Felbermayr, G and Gröschl, J (2014) Naturally negative: the growth effects of natural disasters. Journal of Development Economics 111, 92106.
Ghesquiere, F and Mahul, O (2010) Financial protection of the state against natural disasters. Washington, DC, World Bank Policy Research Working Paper 5429.
Im, K, Pesaran, M and Shin, Y (2003) Testing for unit roots in heterogenous panels. Journal of Econometrics 115, 5374.
Jagger, T and Elsner, J (2006) Climatology models for extreme hurricane winds near the United States. Journal of Climate 19, 32203236.
Judson, R and Owen, A (1991) Estimating dynamic panel data models: a guide for macroeconomists. Economics Letters 65, 915.
Kiviet, JF (1995) On bias, inconsistency, and efficiency of various estimators in dynamic panel data models. Journal of Econometrics 68, 5378.
Levin, A, Lin, CF and Chu, CS (2002) Unit root tests in panel data: asymptotic and finite-sample properties. Journal of Econometrics 108, 124.
Lis, E and Nickel, C (2010) The impact of extreme weather events on budget balances. International Tax and Public Finance 17, 378399.
Melecky, M and Raddatz, C (2011) How do governments respond after catastrophes? Natural-disaster shocks and the fiscal stance. Washington, DC, World Bank Policy Research Working Paper 5564.
Melecky, M and Raddatz, C (2014) Fiscal responses after catastrophes and the enabling role of financial development. World Bank Economic Review 29, 129149.
Mendelsohn, R, Emanuel, K, Chonabayashi, S and Bakkensen, L (2012) The impact of climate change on global tropical cyclone damage. Nature Climate Change 2, 205209.
Nickell, S (1981) Biases in dynamic models with fixed effects. Econometrica 49, 14171426.
Noy, I and Nualsri, A (2011) Fiscal storms: public spending and revenues in the aftermath of natural disasters. Environment and Development Economics 16, 113128.
Ouattara, B and Strobl, E (2013) The fiscal implications of hurricane strikes in the Caribbean. Ecological Economics 85, 105115.
Pesaran, MH (2007) A simple panel unit root test in the presence of cross-section dependence. Journal of Applied Econometrics 22, 265312.
Pesaran, MH and Zhao, Z (1999) Bias reduction in estimating long-run relationships from dynamic heterogeneous panels. In Hsiao, C, Lahiri, K, Lee, LF and Pesaran, MH (eds), Analysis of Panels and Limited Dependent Variables: A Volume in Honour of GS Maddala. Cambridge, UK: Cambridge University Press, chapter 12, pp. 297322.
Scarrott, A and MacDonald, C (2010) Extreme-value-model-based risk assessment of nuclear reactors. Journal of Risk Reliability 224, 239252.
Strobl, E (2012) The economic growth impact of natural disasters in developing countries: evidence from the Central American and Caribbean region. Journal of Development Economics 97, 130141.
Recommend this journal

Email your librarian or administrator to recommend adding this journal to your organisation's collection.

Environment and Development Economics
  • ISSN: 1355-770X
  • EISSN: 1469-4395
  • URL: /core/journals/environment-and-development-economics
Please enter your name
Please enter a valid email address
Who would you like to send this to? *


JEL classification

Type Description Title
Supplementary materials

Ouattara et al. supplementary material
Ouattara et al. supplementary material 1

 PDF (440 KB)
440 KB


Altmetric attention score

Full text views

Total number of HTML views: 0
Total number of PDF views: 0 *
Loading metrics...

Abstract views

Total abstract views: 0 *
Loading metrics...

* Views captured on Cambridge Core between <date>. This data will be updated every 24 hours.

Usage data cannot currently be displayed