Macroeconomic Outcomes in Disaster-Prone Countries

Abstract

Using a dynamic stochastic general equilibrium model, we study the channels through which natural disaster shocks affect macroeconomic outcomes and welfare in disaster-prone countries. We solve the model using Taylor projection, a solution method that is shown to deal effectively with high-impact weather shocks calibrated in accordance to empirical evidence. We find large and persistent effects of weather shocks that significantly impact the income convergence path of disaster-prone countries. Relative to non-disaster-prone countries, on average, these shocks cause a welfare loss equivalent to a permanent fall in consumption of 1.6 percent. Welfare gains to countries that self-finance investments in resilient public infrastructure are found to be negligible, and international aid has to be sizable to achieve significant welfare gains. In addition, it is more cost-effective for donors to contribute to the financing of resilience before the realization of disasters, rather than disbursing aid after their realization.

Keywords: National income, Business cycles, Balance of payments, Interest rate increases, Real interest rates, natural disasters, climate change, DSGE, resilient capital, international aid, WP, disaster-prone, public capital, ex-ante, natural disaster, country group

JEL Classification: E62, F35, H54, H63, H84, O23, Q54, E01, G21, F16,