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

On the Macro Impact of Extreme Climate Events in Central America: A Higher Frequency Investigation Hee Soo Kim, Carlos Chaverri, Emilio Fernandez-Corugedo, and Pedro Juarros WP/22/237IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed i n IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management. 2022 DEC © 2022 International Monetary Fund WP/22/237IMF Working Paper Western Hemisphere Department On the Macro Impact of Extreme Climate Events in Central America: A Higher Frequency Investigation Prepared by Hee Soo Kim, Carlos Chaverri, Emilio Fernandez-Corugedo, and Pedro Juarros* Authorized for distribution by Manuela Goretti November 2022 IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management. ABSTRACT: Central America is one of the world’s most vulnerable regions to extreme climate events. The literature estimates the macroeconomic effects of climate events mainly using annual data, which might underestimate the true effects as these extreme events tend to be short-lived and generate government and family support in response. To overcome this limitation, this paper studies Central American countries’ macroeconomic impact of climatic disasters using high-frequency (monthly) data over the period 2000-2019. We identify extreme climate events by defining dummy variables related to storm and flood events reported in the EM-DAT (Emergency Events Database) and estimate country-specific VAR and panel VAR. The results suggest that a climatic disaster drops monthly economic activity in most countries in the region of around 0.5 to 1 percentage points on impact, with persistent effects on the level of GDP. We show that even as extreme climate events were relatively less severe under our sample period, quantitative effects are similar or larger than previously estimated for the region. In addition, remittances ( transfers from family living abroad) increase for most countries in response to a extreme climate event, acting as a shock absorber. The results are robust to controlling for the severity of the climate events, for which we construct a monthly climate index measuring severity of weather indicators by following the spirit of the Actuaries Climate Index (ACI). JEL Classification Numbers: C32, C33, O44, Q54, F24 Keywords: Climatic disasters; high frequency; CAPDR; VAR Author’s E-Mail Address: Hee Soo Kim: hk74@iu.edu; Carlos Chaverri cchaverrimorales@imf.org; Emilio Fernandez-Corugedo: efernandezcorugedo@imf.org; Pedro Juarros pjuarros@imf.org *Hee Soo Kim is a Ph.D. Graduate student at Indiana University who was an intern at the Fund while this Working Paperwas being prepared. IMF WORKING PAPERS Title of WP INTERNATIONAL MONETARY FUND 3 WORKING PAPERS On the Macro Impact of Extreme Climate Events in Central America:a Higher Frequency Investigation Prepared by Hee Soo Kim, Carlos Chaverri, Emilio Fernandez-Corugedo, and Pedro Juarros 1 1 The authors would like to thank without implicating Alberto Behar, Alina Carare, Manuela Goretti, Christian Henn, Sandra Marcelino, Diego Mesa Puyo, Mariza Montes de Oca Leon, Gregor Schwerhoff and seminar participants at the International Monetary Fund for helpful comments. All errors are our own. IMF WORKING PAPERS Title of WP INTERNATIONAL MONETARY FUND 4 I.INTRODUCTIONCentral America is one of the most vulnerable regions in the world to extreme climatic events such as tropical storms and floods, with sizeable impacts—sometimes devastating—in terms of affected people and economic damages. For instance, the European Commission’s 2020 INFORM Climate Change Index2 identifies all CAPDR countries (Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, Panama, and the Dominican Republic) in the top 30 most vulnerable countries (out of 194), except for Costa Rica (32).3 Understanding the dynamic macroeconomic effects of extreme climate events in CAPDR countries is key to designing ex-ante and ex-post policy interventions to mitigate such impacts. This paper studies the impact of climatic disasters on economic growth and the role of remittances as a shock absorber in Central American countries using high-frequency data. Source: EM-DAT and IMF staff calculations. 2 The INFORM Climate Change index analyzes how risks related to climate change under different emission and socio-economic scenarios will evolve. 3 Relative to the exposure to climate events, the region has a low adaptive capacity, which ceter