Transmission of Flood Damage to the Real Economy and Financial Intermediation: Simulation Analysis using a DSGE Model

Ryuichiro Hashimoto and Nao Sudo
Additional contact information
Ryuichiro Hashimoto: Bank of Japan

No 22-E-5, Bank of Japan Working Paper Series from Bank of Japan

Abstract: This paper quantitatively assesses the indirect effect of floods on the real economy and financial intermediation in Japan by estimating a dynamic stochastic general equilibrium (DSGE) model that incorporates a mechanism through which floods cause the capital stock and the public infrastructure to depreciate exogenously, using the data on flood damage recorded in the Flood Statistics released by the Japanese government. The result of the analysis is twofold. First, flood shocks dampen GDP from the supply side by reducing the capital stock inputs. The decline in GDP then impairs the balance sheets of firms and financial intermediaries, resulting in disruptions to financial intermediation and thus dampening GDP further from the demand side. Even when the direct damage due to floods is fully covered by insurance, the downward pressure on GDP endogenously deteriorates the balance sheets of these sectors, causing the same mechanism to operate. Second, the quantitative impacts of flood shocks on GDP up to now have been minor compared to the standard structural shocks that are considered important in existing macroeconomic studies, including shocks to total factor productivity (TFP) and the subjective discount factor. According to the estimates that use the relationship between the key variables in our model together with climate change scenarios published by an external organization, the impacts of these shocks could become somewhat larger in the future.

Keywords: Climate change; Natural disasters; Physical risk; Financial System; DSGE model (search for similar items in EconPapers)
JEL-codes: E32 E37 E44 Q54 (search for similar items in EconPapers)
Date: 2022-06-03
New Economics Papers: this item is included in nep-dem, nep-dge, nep-env, nep-fdg and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
https://www.boj.or.jp/en/research/wps_rev/wps_2022/data/wp22e05.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:boj:bojwps:wp22e05

Access Statistics for this paper

More papers in Bank of Japan Working Paper Series from Bank of Japan Contact information at EDIRC.
Bibliographic data for series maintained by Bank of Japan ().