Discussion Paper

No. 2017-52 | August 16, 2017
Banking stability, natural disasters, and political conflicts: time series evidence on causality in developing countries


The authors adopt a panel structural VAR modeling approach to model the causal effects of natural disasters and state fragility on aggregate financial system variables such as deposits, non-performing loans, and GDP per capita. They divide the sample by banking sector variable and they develop 8 panels across more than 63 developing countries over a 13 year period (1999–2011) for all countries in the dataset, excluding high-income countries. It is noteworthy that these analyses are the first of their kind to evaluate empirically the link between natural disasters, state fragility and banking variables. The main findings suggest that natural disasters, as measured by a life years lost index, and state fragility are both predictive of higher non-performing loans and higher likelihood of default in developing countries. The results also indicate that natural disasters decrease the banking deposits and financial system deposits while state fragility decrease the banking deposits and increase the financial system deposits.

JEL Classification:

G20, O57


  • Downloads: 263


Cite As

Wassim Rajhi and Pedro Albuquerque (2017). Banking stability, natural disasters, and political conflicts: time series evidence on causality in developing countries. Economics Discussion Papers, No 2017-52, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2017-52

Comments and Questions

Anonymous - Referee Report 1
September 04, 2017 - 08:10

see attached file

Wassim Rajhi and Pedro Albuquerque - Reply to Referee Report 1
September 20, 2017 - 12:06

see attached file

Anonymous - Referee Report 2
September 25, 2017 - 09:19

Referee report “Banking Stability, Natural Disasters, and Political Conflicts: Time Series Evidence on Causality in Developing Countries”

The authors study the complex relationship between banking fragility, natural disasters and the occurence of political conflicts. Although the topic is highly interesting and relevant, the research conducted in this paper is ...[more]

... not up to the academic standards. I have some major concerns about this study which, among others, I will express below.

1. The authors should come up with a theoretical framework in which they connect the three elements: natural disasters, political conflicts and bank fragility, coherently and consistently. Currently, the paper gives only a mediocre and rather incomplete literature review on a number of studies dealing with one of the problems. They should focus much more on connecting the different components.
2. It is not clear where natural disasters/political risk enters the equations (3)-(5)
3. I wonder if the data used on life years lost is appropriate in this case. Banking stability is probably most affected by the destruction of physical capital. This element is completely neglected in the used measure. Besides, this variable is highly endogenous.
4. I do not see why the VAR approach is the most appropriate here. Why not using a simultaneous model?
5. The authors should distinguish between different types of disasters. There is completely no information which disasters are considered or what definition for a disaster has been used.
6. The authors should elaborate more why the state fragility index is a good measure on conflict. Does it not calculate more the likelihood that a conflict might occur?
7. The authors should document much more details on the data and methodology used. For instance, which countries are being covered?
8. The paper is poorly written.

Wassim Rajhi and Pedro Albuquerque - Reply to Referee Report 2
October 17, 2017 - 07:57

see attached file