Insurance Companies and the Propagation of Liquidity Shocks to the Real Economy

125 Pages Posted: 14 Jul 2021

See all articles by Yubo Liu

Yubo Liu

Xiamen University

Stefano Rossi

Bocconi University; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Hayong Yun

Michigan State University - Department of Finance

Date Written: July 2021

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.

JEL Classification: E22, G14, G22, G31, G32

Suggested Citation

Liu, Yubo and Rossi, Stefano and Yun, Hayong, Insurance Companies and the Propagation of Liquidity Shocks to the Real Economy (July 2021). CEPR Discussion Paper No. DP16322, Available at SSRN: https://ssrn.com/abstract=3886808

Yubo Liu (Contact Author)

Xiamen University ( email )

Xiamen, Fujian 361005
China

Stefano Rossi

Bocconi University ( email )

Via Roentgen 1
Milano, MI 20136
Italy

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Hayong Yun

Michigan State University - Department of Finance ( email )

667 N Shaw Lane, Room 339
East Lansing, MI 48824-1122
United States
517-884-0549 (Phone)

HOME PAGE: http://https://sites.google.com/view/hayongyun/

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