Insurance Companies and the Propagation of Liquidity Shocks to the Real Economy

Stefano Rossi, Hayong Yun and Yubo Liu

No 16322, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We study the role of insurance companies in propagating liquidity shocks to the real economy. We use natural disasters as our instrument to identify exogenous shifts in capital-market liquidity, and study whether capital-market liquidity affects regional-level fiscal conditions and output. Aggregate disaster-driven bonds sales of disaster-unaffected municipal bonds by exposed insurers cause low GDP growth and high unemployment. In micro data, natural disasters trigger large, unexpected redemptions of property-insurance contracts, causing: fire sales of municipal bonds; increased borrowing costs in primary markets; decreased muni issuance; lower investment in muni-reliant sectors. Therefore, insurance companies do propagate liquidity shocks to the real economy.

Keywords: Insurance companies; Market liquidity; Natural disasters; Fire sales; Reinsurance; Public and private investment (search for similar items in EconPapers)
JEL-codes: E22 G14 G22 G31 G32 (search for similar items in EconPapers)
Date: 2021-07
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