Working Paper: CEPR ID: DP16322
Authors: Stefano Rossi; Hayong Yun; Yubo Liu
Abstract: We study the role of insurance companies in propagating liquidity shocks to the real economy. We use natural disasters as our instrument to identify exogenous shifts in capital-market liquidity, and study whether capital-market liquidity affects regional-level fiscal conditions and output. Aggregate disaster-driven bonds sales of disaster-unaffected municipal bonds by exposed insurers cause low GDP growth and high unemployment. In micro data, natural disasters trigger large, unexpected redemptions of property-insurance contracts, causing: fire sales of municipal bonds; increased borrowing costs in primary markets; decreased muni issuance; lower investment in muni-reliant sectors. Therefore, insurance companies do propagate liquidity shocks to the real economy.
Keywords: insurance companies; market liquidity; natural disasters; fire sales; reinsurance; public and private investment
JEL Codes: G22; G14; G32; G31; E22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Natural disasters (H84) | liquidity shocks (E44) |
| liquidity shocks (E44) | regional-level fiscal conditions (H70) |
| liquidity shocks (E44) | output (C67) |
| fire sales of municipal bonds (H74) | fiscal conditions (E62) |
| fire sales of municipal bonds (H74) | investment activities in affected regions (O16) |
| $1 billion increase in net sales by insurers (G52) | 0.92% decrease in GDP growth (F69) |
| $1 billion increase in net sales by insurers (G52) | 1.9% increase in unemployment (J64) |