We estimate the causal effect of natural catastrophes on financial development. We focus on largest catastrophes in developing economies in 1960-2016, employ synthetic control method to compute the counterfactual and use the credit to GDP ratio as the measure of financial development. Our estimates show that the effects of natural catastrophes are sizable, statistically significant and long-lasting. We find that a decade after the catastrophe, credit/GDP ratio remains approximately 30% below its counterfactual. This result suggests that large-scale natural catastrophes severely undermine financial intermediation in developing economies.
Natural catastrophes financial development synthetic control method