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THE INFLATIONARY COSTS OF EXTREME WEATHER:
EVIDENCE FROM THE CARIBBEAN
Andreas Heinen
Universite Cergy-Pontoise
Jeetendra Khadan
International Development Bank
Eric Strobl
Ecole Polytechnique & SALISES
INTRODUCTION
 Extreme weather: nearly US$3 trillion damages globally since 1980
 Caribbean: 9% loss of annual GDP by 2030 (CCRIF,2010)
 Examples:
o Hurricane Ivan (2004) – 300 % of Grenada’s GDP
o 2013 Xmas Floods – 15% of St. Vincent & the Grenadines’ GDP
 Literature on natural disasters focuses on long-term (GDP growth)
 However, the short-term adjustment will determine the extent of the
long-term impact
INTRODUCTION
 Natural disaster→ shortage of goods & services → prices ↑
 Understanding this process can be important for policymakers
 Only one study of short-term impact on prices - impact
This Study:
a. Estimates the inflationary costs of floods and hurricanes for the
Caribbean
b. Calculates expected welfare costs using case study of Jamaica
DATA
 Constructed data for:
(i)
Hurricane destruction: use storm track data, a wind field model,
and local exposure measure
(ii)
Flood destruction: use rainfall data, intensity duration model, and
local exposure measure
(iii) Prices: monthly data on CPI and sub-categories
→ nearly-balanced monthly panel of 15 Caribbean countries/territories
over 2001-2012
SUMMARY STATISTICS
(i)
Hurricane Destruction:
In any month there is a 6.3 % chance of hurricane
damages
(ii)
Flood Destruction:
In any month there is a 30 % of flood damages
SUMMARY OF ESTIMATION RESULTS
Estimation Results:
1.
Hurricanes: contemporary and lagged inflationary impact on
aggregate, food, housing & utilities, and other goods & services
2.
Floods: contemporary inflationary impact on aggregate, food
and other goods and services, but not on housing and utilities
SUMMARY OF ECONOMETRIC RESULTS
Observed Impacts (% pts):
1.
Across all price categories hurricanes cause on average about a
40% increase in monthly prices; floods cause on average about 20 %
increase in monthly prices
2.
The really large observed events caused prices to increase multi-
fold, particularly for hurricanes
EXPECTED WELFARE COSTS
 Expected welfare costs of ‘inflationary’ extreme weather?
 Need two components:
(i)
Welfare cost: compensating variation – amount of additional
money needed to keep a household at the same level of
‘happiness’
(ii)
Probability: bivariate peak over threshold modeling of
hurricane & floods
EXPECTED WELFARE COSTS
 Case study of Jamaica (JSLC 2012) - calculated goods’ shares (food,
h&u, other) and estimated price elasticities
Results:
Mean Compensating Variation (CV) as % of Household Income:
Event (yrs):
CV (%):
1
0.22
5
10
50
1.57
4.14
41.03
EXPECTED WELFARE COSTS
.41
.4
.39
.38
Compensating Varation
.42
50 Year Event – CV (%)
0
20000
40000
60000
Consumption per Capita
80000
100000
CONCLUSION
 Investigated the inflationary impact of extreme weather in the
Caribbean → non-negligible
 Using case study of Jamaica showed that expected welfare costs can
be substantial, especially for the poor
 Policy makers may want to take this into account in disaster
management planning