Macroeconomic Outcomes in Disaster-Prone Countries
This paper studies the channels through which natural disaster shocks affect macroeconomic outcomes and welfare 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.
This work is part of the ‘Macroeconomics in Low-income countries’ programme
Citation
Alessandro Cantelmo, Giovanni Melina and Chris Papageorgiou. Macroeconomic Outcomes in Disaster-Prone Countries. IMF Working Paper No. 19/217