Macroeconomic Fluctuations Under Natural Disaster Shocks in Central America and the Caribbean

This paper examines the role of disaster shock in a one-sector, representative agent Dynamic Stochastic General Equilibrium (DSGE) model. Firstly, we estimate a Panel Vector Autoregresive (VAR) model for output, investment, trade balance, consumption and country spread to capture the economic effects of output, country risk and exogenous natural disaster shocks. We determined the empirical dynamic responses of 10 countries of the Caribbean and 7 countries in Central America. Secondly, by taking into account rare events and trend shocks, this paper also provides a baseline framework of the dynamic interactions between the macroeconomic effects of rare events and financial friction for two specific countries: Barbados and Belize. Similar findings between empirical and general framework show that disaster shocks in Central America and the Caribbean have only a significative impact in the short run regional business cycle. The findings show that Caribbean countries are better prepared for natural disaster shocks