Strengthening Fiscal Frameworks in the Presence of Rising Risk of Natural Disasters

Olusegun Ayodele Akanbi, Jessie Kilembe and Do Yeon Park

No 2025/038, IMF Working Papers from International Monetary Fund

Abstract: This study investigates the impact of rising risk of natural disasters on rule-based fiscal frameworks. It explores the extent to which countries adhere to their fiscal rules in the presence of rising risk of natural disasters. To ensure a consistent analysis, we construct an index measuring the strenghth of fiscal rules, utilizing principal component analysis for a panel of 104 countries. The study employs a panel two-stage least squares estimation method to assess the impact of natural disaster risks on fiscal rules. The results, which are robust across various country groupings, suggest that natural disaster risks play a significant role in the determination of rule-based fiscal framework. After controlling for other determinants, the results show that countries with established fiscal rules are strengthening these rules in response to rising natural disaster risks. Nonetheless, the results are mixed across different country groups, with varying magnitude of impact. This suggests that countries currently operating fiscal rules will need to enhance their efforts to more comprehensively integrate natural disaster risks into their fiscal frameworks.

Keywords: Fiscal Framework; Fiscal Rules; Natural Disasters; Fiscal sustainability; exposure risk index; natural disaster risk; risk of natural disasters; government climate investment profile; high-ERI country; Fiscal governance; Fiscal risks; Global (search for similar items in EconPapers)
Pages: 38
Date: 2025-02-07
New Economics Papers: this item is included in nep-env
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