Munich Personal RePEc Archive

Fiscal Rules for Natural Disaster- and Climate Change-Prone Small States

Nakatani, Ryota (2021): Fiscal Rules for Natural Disaster- and Climate Change-Prone Small States.

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Abstract

How should small states formulate a countercyclical fiscal policy to achieve economic stability and fiscal sustainability when prone to natural disasters, climate change, commodity price changes, and uncertain donor grants? We study how natural disasters and climate change affect long-term debt dynamics and propose cutting-edge fiscal policy rules. We find the advantages of a recurrent expenditure rule based on non-resource and non-grant revenue, interdependently determined by government debt and budget balance targets with expected disaster shocks. Our rule-based fiscal policy framework is practically applicable for many developing countries facing increasing frequency and impact of devastating natural hazards and climatic change.

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