Local Shocks, Limited Fiscal Response: Natural Disasters and Municipal Public Finances in Colombia

Oscar Becerra, Brigitte Castañeda, David Perez-Reyna and Angel Avila
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Brigitte Castañeda: Universidad de los Andes
Angel Avila: Universidad de los Andes

No 2026-48, Documentos CEDE from Universidad de los Andes, Facultad de Economía, CEDE

Abstract: This paper examines how natural disasters affect local economic activity and municipal public finances in Colombia between 2000 and 2024. Using an event-study design across 1,101 municipalities, we exploit the timing of high-intensity hydrometeorological shocks. We find that disasters cause a persistent decline in local economic activity, reducing nighttime luminosity by 3% in smaller municipalities. However, municipal public finances exhibit no countercyclical response: aggregate revenues, expenditures, and intergovernmental transfers remain largely unchanged. This muted fiscal reaction reflects institutional rigidities, including earmarked transfers and statutory spending limits, highlighting the need for rule-based, automatic parametric funding mechanisms to enhance subnational resilience.

Keywords: Fiscal federalism; natural disasters; subnational governments (search for similar items in EconPapers)
JEL-codes: H72 H77 Q54 (search for similar items in EconPapers)
Pages: 53
Date: 2026-09
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Published in Documentos CEDE, Universidad de los Andes.

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Persistent link: https://EconPapers.repec.org/RePEc:col:000089:023643

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