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Impact of Natural Disasters on Financial Development

Author

Listed:
  • Subhani Keerthiratne

    (University of Sussex
    Central Bank of Sri Lanka)

  • Richard S. J. Tol

    (University of Sussex
    Vrije Universiteit
    Vrije Universiteit
    Tinbergen Institute)

Abstract

We estimate the impact of natural disasters on financial development proxied by private credit. We employ a panel fixed effects estimator as our main estimation tool on a country level panel data set of natural disasters and other economic indicators covering 147 countries for the period from 1979 to 2011. We find that companies and households get deeper into debt after a natural disaster. This effect is stronger in poorer countries whilst the effect is weaker in countries where agriculture is more important. The magnitude of per capita credit varies across countries regardless of their per capita income. Hence, the real impact of disasters on credit as a share of prevailing per capita credit is country specific as well as time specific. Our findings are robust to alternative estimators, specifications, samples and data. Private credit is only one dimension of financial development and financial markets are less well developed in poor countries which are more vulnerable to disasters. Thus, the immediate impact of natural disasters is better interpreted as households getting (further) into debt rather than as financial development, but we find longer term impacts too that indicate an expansion of credit availability.

Suggested Citation

  • Subhani Keerthiratne & Richard S. J. Tol, 2017. "Impact of Natural Disasters on Financial Development," Economics of Disasters and Climate Change, Springer, vol. 1(1), pages 33-54, June.
    • Handle: RePEc:spr:ediscc:v:1:y:2017:i:1:d:10.1007_s41885-017-0002-5
    DOI: 10.1007/s41885-017-0002-5
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    More about this item

    Keywords

    Natural disasters; Economic impact; Financial development; Private credit;
    All these keywords.

    JEL classification:

    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • G00 - Financial Economics - - General - - - General
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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