Economic impact of natural disaster shocks in Latin America and the Caribbean: The role of financial development

This paper examines the macroeconomic effects of natural disasters in Latin America and the Caribbean (LAC) and assesses whether financial development mitigates these impacts. Using annual data for 26 LAC economies over 2000-2021, the analysis applies panel local projections to estimate the cumulative response of GDP growth to disaster shocks, measured by the share of the population affected. The results show that natural disasters exert a modest but negative contemporaneous effect on GDP growth, followed by a gradual return toward the pre-shock trajectory. Financial development attenuates these adverse effects, reducing the immediate output loss associated with disasters and supporting medium-term recovery. Disaggregated results indicate that financial markets play a particularly important role, exerting a stronger stabilizing effect than financial institutions. Robustness exercises using alternative shock definitions, income groups, pre-sample financial conditions, and instrumental-variable local projections confirm the main findings. Overall, the results highlight the importance of strengthening financial systems, and especially domestic capital markets, as part of broader strategies to enhance macroeconomic resilience to climate-related shocks in the region.