On the Macro Impact of Extreme Climate Events in Central America: A Higher Frequency Investigation

OntheMacroImpactofExtremeClimateEventsinCentralAmerica:AHigherFrequencyInvestigation HeeSooKim,CarlosChaverri,EmilioFernandez-Corugedo,andPedroJuarros WP/22/237 IMFWorkingPapersdescriberesearchinprogressbytheauthor(s)andarepublishedtoelicitcommentsandtoencouragedebate. TheviewsexpressedinIMFWorkingPapersarethoseoftheauthor(s)anddonotnecessarilyrepresenttheviewsoftheIMF,itsExecutiveBoard,orIMFmanagement. 2022 DEC ©2022InternationalMonetaryFundWP/22/237 IMFWorkingPaper WesternHemisphereDepartment OntheMacroImpactofExtremeClimateEventsinCentralAmerica:AHigherFrequencyInvestigation PreparedbyHeeSooKim,CarlosChaverri,EmilioFernandez-Corugedo,andPedroJuarros* AuthorizedfordistributionbyManuelaGorettiNovember2022 IMFWorkingPapersdescriberesearchinprogressbytheauthor(s)andarepublishedtoelicitcommentsandtoencouragedebate.TheviewsexpressedinIMFWorkingPapersarethoseoftheauthor(s)anddonotnecessarilyrepresenttheviewsoftheIMF,itsExecutiveBoard,orIMFmanagement. ABSTRACT:CentralAmericaisoneoftheworld’smostvulnerableregionstoextremeclimateevents.Theliteratureestimatesthemacroeconomiceffectsofclimateeventsmainlyusingannualdata,whichmightunderestimatethetrueeffectsastheseextremeeventstendtobeshort-livedandgenerategovernmentandfamilysupportinresponse.Toovercomethislimitation,thispaperstudiesCentralAmericancountries’macroeconomicimpactofclimaticdisastersusinghigh-frequency(monthly)dataovertheperiod2000-2019.WeidentifyextremeclimateeventsbydefiningdummyvariablesrelatedtostormandfloodeventsreportedintheEM-DAT(EmergencyEventsDatabase)andestimatecountry-specificVARandpanelVAR.Theresultssuggestthataclimaticdisasterdropsmonthlyeconomicactivityinmostcountriesintheregionofaround0.5to1percentagepointsonimpact,withpersistenteffectsonthelevelofGDP.Weshowthatevenasextremeclimateeventswererelativelylesssevereunderoursampleperiod,quantitativeeffectsaresimilarorlargerthanpreviouslyestimatedfortheregion.Inaddition,remittances(transfersfromfamilylivingabroad)increaseformostcountriesinresponsetoaextremeclimateevent,actingasashockabsorber.Theresultsarerobusttocontrollingfortheseverityoftheclimateevents,forwhichweconstructamonthlyclimateindexmeasuringseverityofweatherindicatorsbyfollowingthespiritoftheActuariesClimateIndex(ACI). JELClassificationNumbers: C32,C33,O44,Q54,F24 Keywords: Climaticdisasters;highfrequency;CAPDR;VAR Author’sE-MailAddress: HeeSooKim:hk74@iu.edu;CarlosChaverricchaverrimorales@imf.org;EmilioFernandez-Corugedo:efernandezcorugedo@imf.org;PedroJuarrospjuarros@imf.org *HeeSooKimisaPh.D.GraduatestudentatIndianaUniversitywhowasaninternattheFundwhilethisWorkingPaperwasbeingprepared. WORKINGPAPERS OntheMacroImpactofExtremeClimateEventsinCentralAmerica:aHigherFrequencyInvestigation PreparedbyHeeSooKim,CarlosChaverri,EmilioFernandez-Corugedo,andPedroJuarros1 1TheauthorswouldliketothankwithoutimplicatingAlbertoBehar,AlinaCarare,ManuelaGoretti,ChristianHenn,SandraMarcelino,DiegoMesaPuyo,MarizaMontesdeOcaLeon,GregorSchwerhoffandseminarparticipantsattheInternationalMonetaryFundforhelpfulcomments.Allerrorsareourown. I.INTRODUCTION CentralAmericaisoneofthemostvulnerableregionsintheworldtoextremeclimaticeventssuchastropicalstormsandfloods,withsizeableimpacts—sometimesdevastating—intermsofaffectedpeopleandeconomicdamages.Forinstance,theEuropeanCommission’s2020INFORMClimateChangeIndex2identifiesallCAPDRcountries(CostaRica,ElSalvador,Guatemala,Honduras,Nicaragua,Panama,andtheDominicanRepublic)inthetop30mostvulnerablecountries(outof194),exceptforCostaRica(32).3UnderstandingthedynamicmacroeconomiceffectsofextremeclimateeventsinCAPDRcountriesiskeytodesigningex-anteandex-postpolicyinterventionstomitigatesuchimpacts.ThispaperstudiestheimpactofclimaticdisastersoneconomicgrowthandtheroleofremittancesasashockabsorberinCentralAmericancountriesusinghigh-frequencydata. Table1.CAPDR:Summarystatisticsofreportedfloodsandstorms Table1a.1960-2022 Floods Event1/ Averageduration Storms oftheevent2/ Averagedurationoftheevent Average Damages(%ofGDP) Median#Eventsreported3/ Honduras 38 0.12 25 0.11 5.45% 0.50% 21 Guatemala 35 0.09 20 0.09 1.04% 0.15% 24 ElSalvador 18 0.14 18 0.06 2.75% 1.66% 12 Nicaragua 23 0.36 24 0.08 6.39% 0.23% 12 DominicanRepublic 30 0.09 39 0.05 1.11% 0.21% 18 CostaRica 30 0.15 10 0.10 0.87% 0.30% 15 Panama 40 0.14 8 0.02 0.19% 0.04% 15 Total2.54%0.21% Table1b.2000-2019 Honduras 20 0.19 11 0.12 0.43% 0.16% 8 Guatemala 22 0.13 14 0.11 0.18% 0.02% 5 ElSalvador 11 0.20 11 0.06 3.20% 3.68% 4 Nicaragua 16 0.46 14 0.07 0.02% 0.02% 3 DominicanRepublic 21 0.13 23 0.04 0.22% 0.07% 10 CostaRica 19 0.19 4 0.16 0.21% 0.26% 4 Panama 25 0.14 2 0.02 0.02% 0.01% 5 Total0.97%0.15% 1/EM-DATasofMay,2022.2/Inmonths 3/Notallrecordedeventshaveestimateddamages Source:EM-DATandIMFstaffcalculations. 2TheINFORMClimateChangeindexanalyzeshowrisksrelatedtoclimatechangeunderdifferentemissionandsocio-economicscenarioswillevolve. 3Relativetotheexposuretoclimateevents,theregionhasalowadaptivecapacity,whichceterisparibusmakesthemmorevulnerablewithahigherimp