# **_B.2.2._** _Effects of Natural Disasters on Macroeconomic Variables_

This section analyzes the impact of catastrophic events on macroeconomic variables for a sample of 16 countries (6 from the Caribbean region and 10 from Latin America).<sup>7</sup> The impact of catastrophic events on macroeconomic variables (production, public and private consumption, investment and extemal balance<sup>8</sup> ) is estimated using dynamic panel data (DPD) models based on generalized methods of moments (GMM).<sup>9</sup> The catastrophic ev'ents considered are those described in Table 1.6. Catastrophic events are proxied by a variable (Cat) which takes the value of the costs of the damage (as percentage of GDP) in the year when the catastrophic events occur and zero otherwise.'° Additionally, changes in (log) income Ay, (log) consumption Ac and (log) investment Ainv are modeled as autoregressive processes. After experimentation, two lags of the dependent variables appear to be sufficient to capture their auto-regressive components.

Table 1.7 reports the equations for production, total consumption and investment. In each equation, the catastrophe variable (Cat) has the sign expected from Table 1.4 and is statistically significant at conventional level of confidence. A catastrophic event leads to a fall in output, consumption and investment growth. However, the coefficient of the catastrophe variable shows that most of the impact is on investment growth (-0.49) while the impact on total consumption growth (-0.09) is more moderate. Simulations based on these regressions indicate a worsening of the current account in the aftermath of a catastrophic shock.

> 7 Countnes included in the sample are Barbados, Bolivia, Colombia, Costa Rica, Dominica, Dominican Republic, Ecuador, El Salvador, Guatemala, Haiti, Honduras, Jamaica, Mexico, Nicaragua, Peru and Trinidad and Tobago. These countries were selected on the basis of the availability of information regarding the catastrophic events and the macroeconomic variables. Information on catastrophic events and damages are from Charvernat, 2000, p. 30 as reported in Table 1.6. Macroeconomic indicators (GDP, investment, and pnvate and public consumption) for the pernod 1960-98 are from an extended version of the Penn World Tables (Summer and Heston, 1992). Extemal balance is defined as the difference between production and the sum of consumption and investment. 9 The GMM estimator is based on first differencing, and controls for the endogeneity of the lagged dependent variable and the potential endogeneity of the other explanatory variables (see Arellano, 1993; Arellano and Bond, 1998).

> '° Costs of damage are those reported in the last column of Table 1.6. In the few cases when damages are not reported we used the average of the other catastrophic events that occurred in the country or the average costs of the catastrophic events of all countnes when information on other castastrophic damages was not available for this country. The results are robust to changes of specification. For example, we conducted the same regressions with a dummy variable which takes the value I in the year when a catastrophic event occurs (and 0 otherwise) and found very similar results.

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