How Do Shocks Affect International Reserves? A Quasi-experiment of Earthquakes

Abstract

We evaluate the change in international economic reserves in the aftermath of significant external shocks by using a quasi-experimental setup and focusing on earthquakes. Our objective is to understand the macroeconomic dynamics of quake-affected countries post-earthquake, and their pre-earthquake disaster risk mitigation strategies.

The estimation is done on a panel of 103 countries over the period 1979–2016. We find that in the five years following a large earthquake:

1. Exposed countries accumulate reserves post-earthquake for precautionary reasons, supported by the inflows of foreign assistance and money expansion

2. Quake-prone countries tend to hold fewer reserves relative to the non-prone countries, suggested by the richer set of other disaster preventive measures in place for the former

3. The patterns of reserves holding post-earthquake vary with a country’s income level and other macroeconomic fundamentals.