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Financial and Fiscal Instruments for Catastrophe Risk Management

Financial and Fiscal Instruments for Catastrophe Risk Management

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This applied study addresses the large flood exposures of Central Europe and proposes efficient financial and risk transfer mechanisms to mitigate fiscal losses from such natural catastrophes. In 2010 the V-4 Visegrad countries (i.e., Poland, Czech Republic, Hungary and Slovakia) demonstrated their historical vulnerability to floods – Poland suffered $3.2 billion in flood related losses, comparable to it $3.5 billion of losses in 1997. Flood modeling analysis of the V-4 shows that a disaster event with a 5 percent probability in any given year can lead to economic losses in these countries of between 0.6 percent to 1.9 percent of GDP, as well as between 2.2 percent to 10.7 percent of government revenues. Larger events could quadruple such losses. The European Union Solidarity Fund is available as a mechanism for disasters but it comes into effect at only very high levels of losses, does not provide sufficient funding, and is not speedy
This applied study addresses the large flood exposures of Central Europe and proposes efficient financial and risk transfer mechanisms to mitigate fiscal losses from such natural catastrophes. In 2010 the V-4 Visegrad countries (i.e., Poland, Czech Republic, Hungary and Slovakia) demonstrated their historical vulnerability to floods – Poland suffered $3.2 billion in flood related losses, comparable to it $3.5 billion of losses in 1997. Flood modeling analysis of the V-4 shows that a disaster event with a 5 percent probability in any given year can lead to economic losses in these countries of between 0.6 percent to 1.9 percent of GDP, as well as between 2.2 percent to 10.7 percent of government revenues. Larger events could quadruple such losses. The European Union Solidarity Fund is available as a mechanism for disasters but it comes into effect at only very high levels of losses, does not provide sufficient funding, and is not speedy

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Publish date: Jul 2012
Added to Scribd: Jul 02, 2012
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12/19/2015

Note: The fgure shows the cumulative impulse response functions (IRF) for GDP, government defcit,
government expenditures, and government revenues, for a sample of Middle Income countries accord-
ing to the World Bank classifcation. GDP and government defcit are expressed in real per capita terms;
government expenditures and revenues are expressed as fractions of the long run government defcit.
The parameters used to estimate the IRF come from the baseline specifcation with all variables expressed
in levels (except the interest rate), and including two lags. The order of the endogenous variables entered
in the VAR is the following: government expenditures, GDP, infation, interest rate, and government
revenues. The model also includes country specifc means and trends, and with time fxed efects that
capture global variables. The government defcit is obtained as the weighted diference of revenues and
expenditures. The solid lines show the cumulative percentage deviation of each variable from its trend
resulting from a climatic, geological or other natural disasters occurred at time 0 (time in years). The dot-
ted lines show one standard deviation confdence bands.

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Climatic, GDP

Climatic, Govt. Deficit

Climatic, Govt. Expenditure

Climatic, Govt. Revenue

Geological, GDP

Geological, Govt. Deficit Geological, Govt. Expenditure Geological, Govt. Revenue

Other, GDP

Other, Govt. Deficit

Other, Govt. Expenditure

Other, Govt. Revenue

Time in years

Financial and Fiscal Instruments for Catastrophe Risk Management

177

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