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Three Essays on Macroeconomic Vulnerabilities in the Caribbean Open Access

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This dissertation studies several of the macroeconomic vulnerabilities that Caribbean countries face, focusing on their constraints to economic growth like their small size and their island nature, the contributions that tourism has had in their economies, and their vulnerabilities to both natural disasters and climate change. The first chapter analyzes the growth experience of the Caribbean countries from a cross country perspective and seeks to identify the main determinants and constraints to growth in the Caribbean. A growth accounting exercise that explicitly accounts for the destruction of the capital stock by hurricanes, as well as panel growth regressions show that the Caribbean economic slowdown is explained more by a decline in productivity rather than a lack of investment; that the tourism industry has been a significant contributor to higher growth (through both capital accumulation and productivity) and to lower output volatility; and finally that the small size and island nature of these countries have limited their growth. The second chapter measures the effects that natural disasters have on per capita GDP and on the debt to GDP ratio in the Caribbean. Two types of natural disasters are studied –storms and floods– given their prevalence in the region, while considering the effects of both moderate and severe disasters. I use a vector autoregressive model with exogenous natural disasters shocks, in a panel of 12 Caribbean countries over a period of 40 years. The results show that both storms and floods have a negative effect on growth, and that debt increases with floods but not with storms. However, in a subsample I find that storms significantly increase debt in the short and long run. I also find weak evidence that debt relief contributes to ease the negative effects of storms on debt.The third chapter studies the economic costs of hurricanes in the Caribbean by constructing a novel dataset that combines a detailed record of tropical cyclones’ characteristics with reported damages. I estimate the relation between hurricane wind speeds and damages in the Caribbean using a panel fixed-effect model; finding that the elasticity of damages to GDP ratio with respect to maximum wind speeds is three in the case of landfalls. The data show that hurricane damages are considerably underreported, particularly in the 1950s and 1960s, with average damages potentially being three times as large as the reported average of 1.6 percent of GDP per year. I document and show that hurricanes that do not make landfall also have considerable negative impacts on the Caribbean economies. Finally, I estimate that the average annual hurricane damages in the Caribbean will increase between 22 and 77 by the year 2100, in a global warming scenario of high CO2 concentrations and high global temperatures.

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